Financial instruments — Macro hedge accounting (IASB only)
The IASB discussed how the proposed portfolio revaluation approach might be applied with respect to accounting for macro hedging activities for risks other than interest rate risk.
To date, the Board’s discussions on the accounting for macro hedging activities have focused on a portfolio revaluation approach where macro hedging activity for interest rate risk is undertaken by banks. At the September 2011 IASB meeting, it was discussed that the intention of the IASB was to develop an accounting model for macro hedging activities that would accommodate different types of risk (i.e., not limited to the accounting for macro hedging activities of interest rate risk or the needs of financial institutions). At this meeting, the staff presented their initial findings on the outreach undertaken to date in order to identify instances in which macro hedging activity for open portfolios is undertaken for risks other than interest rate risk, and to consider the relevance of a revaluation approach to that activity. The staff noted that some corporates do undertake macro hedging activity for foreign exchange risk and/or commodity price risk.
Providing possible solutions for macro hedging activity of these risks, the staff believed that although the revaluation approach is expected to be most widely applied by financial institutions managing interest rate risk on open portfolios, it should not be restricted to interest rate risk. The staff also noted similarities in different types of risk management activities which is expected to result in the majority of guidance on the revaluation approach being applicable to macro hedging activity of open portfolios regardless of the particular hedged risk. However, the staff acknowledged that some specific guidance may be required for particular aspects of different risks. The staff also noted that further outreach was required to understand the scope of risks managed in an open portfolio and the interaction of a macro hedging model with that of the general hedging model.
The Board was not asked to make any tentative decisions on this paper, but feedback was requested to the staff’s analysis. That feedback can be summarised as follows:
- A need for more outreach. The staff highlighted that its outreach regarding the application of a revaluation approach to macro hedging activities for open commodity portfolios was limited in scope at this point. As a result, many Board members highlighted the need for more outreach (particularly outreach to corporates and users) to understand needs for solutions for macro hedging activity of other than interest rate risks. However, others expressed concern that continued outreach activity would extend the project completion date. Instead, they preferred that the Board move forward with issuance of a Discussion Paper as a source of constituent feedback.
- Scope of the model. One Board member questioned whether the macro hedging model should capture only risks which result in an accounting mismatch (such as interest rate risk), or should also consider those risks which do not create an accounting mismatch (such as foreign exchange risk since recognised foreign currency monetary items are revalued for spot foreign exchange under IAS 21 The Effects of Changes in Foreign Exchange Rates). The Board member rhetorically asked whether the Board wanted pipeline trades, forecast transactions and firm commitments in the model. If so, he believed more outreach was needed.
Hearing this feedback, the staff expressed an intention to continue drafting the Discussion Paper, which will provide an overview of the revaluation model considering IASB discussions to date.
General hedge accounting
Subsequent to discussing macro hedge accounting, the IASB Chair requested a status update on the general hedge accounting proposals. In September 2012, the IASB published on its website a staff draft of the general hedge accounting section of IFRS 9 which was intended to illustrate the IASB's position while at the same time allowing constituents to familiarise themselves with the document. However, the staff noted that constituents had used the staff draft as an opportunity to comment on specific proposals. The staff does not intend to revisit previous tentative decisions of the Board. However, the staff noted two issues which it intends to bring to the Board at its January 2013 meeting; those issues relate to the interaction of the general hedge accounting proposals with the macro hedging project and IAS 39 Financial Instruments: Recognition and Measurement requirements, as well as the application of the model to cross-currency swaps.