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Financial instruments — Macro hedge accounting

Date recorded:

The Board continued their discussion on development of a net valuation approach macro hedge accounting model. Similar to previous meetings, this session was an educational session where no decisions were made.

Information regarding the valuation of the risk position

The net valuation approach aims to revalue the risk position to coincide with the revaluation of the hedging instrument. The staff described the revaluation of the risk position as a present value (or fair value-type) measurement based on the expected cash flows and a discount rate comprised of a benchmark interest rate adjusted to be internally consistent with the expected cash flows.

The effectiveness of the hedging relationship (from a risk management perspective) depends on the target set for risk management activities and the risk limits that indicate the targeted level of deviation. The valuation changes are driven by both market developments (both observable and non-observable) and management decisions (both pre-determined and ad hoc decisions).

The staff highlighted that unlike a fair value measurement focused on market-based measures, this valuation approach would be impacted by management decisions. Those management decisions can be further broken down in to adjustments from changes in the risk management strategy and those that improve the valuation of the risk position to better reflect the existing risk management strategy.

The staff noted that the Board will need to consider whether to prohibit changes or allow them which then requires consideration of whether the change should be recognised retrospectively (e.g., immediately in profit or loss as ineffectiveness) or prospectively and amortised into earnings over future periods.

The Board discussion began with one member asking for further clarification over a fair value measure under IFRS 13 Fair Value Measurements and the valuation approach described by the staff where an entity’s own risk management practices would impact the valuation. Another Board member expressed some concern with this concept analogising it to a ‘Level 4’ fair value measurement.

A few Board members also expressed some concern over the possibility of amortising changes in the hedge relationship rather than recognising immediately as ineffectiveness. One Board member noted that such an approach may also create operational issues associated with tracking.

Application of valuation approach to core demand deposits

The staff presented the Board with an illustrative example of a valuation approach for core demand deposits.

A couple of Board members raised issues with the presentation for core demand deposits. One Board member noted the Board has not discussed measuring core demand deposits at an amount other than par. Another Board member questioned whether the deposits would be remeasured at an amount other than par or whether a valuation reserve would be created with the amounts shown on a net basis. A couple of Board members also raised the issue of whether the macro hedge accounting model should permit cash flow hedging as the net valuation approach is a fair value hedging based model.

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