Financial Instruments: Outreach Activities Update (IASB)

Date recorded:

Hedge accounting

The staff provided a summary of user outreach feedback with regards to the hedge accounting guidance. Based on this outreach most users exclude the fair value changes arising from derivatives used for hedging when analysing the entity's performance. Rather the effects of forecasted transactions are reflected in adjustments to hedged items based on the contractual terms of the derivatives. In addition, users have indicated that ineffectiveness is not perceived as problem that should constitute a hurdle in applying hedge accounting.

The majority of users consider the hedge accounting guidance as overly complicated. The staff also noted that users rely on management risk reports rather than on GAAP measures that are audited as they perceived that the risk reports are more aligned to the risk management strategy of the entity. Moreover, the risk reports address the issue based on the risk facing the entity (FX risk, interest rate risk, etc.) rather than using the accounting jargon that many analysts do not understand (cash-flow hedges, fair value hedges).

Based on the outreach activities, most users support retaining hedge accounting. Moreover, most of the users would prefer a more fundamental revisiting of hedge accounting rather than minor tweaks, even if that would mean delay of the publication of the hedge accounting guidance.


Amortised cost and Impairment

The staff provided a brief overview of the Expert Advisory Panel on impairment (EAP) discussions. The EAP discussed possible simplifications of the allocation of the initial expected losses and decided to explore several of the approaches (e.g. based on adjustment of the contractual interest revenue in the accounting system using an allocation profile for expected credit losses derived from expected loss data in risk systems).

The EAP also discussed possible usage of Basel II expected losses data and required adjustments to these data in order for them to be used for the proposed expected loss model.

The staff clarified that the EAP would discuss 3 additional models; FASB model, the Basel Committee model and the model proposed by the European Banking Federation.

The staff summarised that even though preparers continue to be concerned by operational concerns and implementation costs, there seems to be overall broad agreement that any model should address frontloading of the interest revenue by the incurred loss model.

The staff also noted that some constituents perceive the overall amortised cost model as complicated as it includes the present value calculation and is based on discounted cash flows. Nonetheless, these are the features of the current Amortised cost model as well.

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