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Financial Instruments: Hedge Accounting

Date recorded:

Eligible hedged items: derivatives as hedged items

The Board discussed whether derivatives should be eligible as hedged items. The staff argued that many entities are economically required to enter into transactions that result in commodity price risk, interest rate risk, and foreign exchange risk, and they manage these risks independently of each other.

Most Board members agreed with the idea that hedge accounting should reflect the management of the risk of the underlying (including a derivative) as modified by another derivative, if that is an entity's strategy used for managing different risks. Nonetheless, many Board members were concerned that the proposed wording was too general and could allow general designation of derivatives as hedged items. Those Board members noted that although such designation would have no net effect on profit or loss, because all derivatives should be measured at fair value through profit or loss, it might decrease clarity and increase opportunity for structuring.

The staff responded that even now there are some exceptions to the general prohibition of designating derivatives as hedged items (a purchased option is eligible to be designated as a hedged item if it hedged by a written option). Moreover, some special types of derivatives might not qualify for measurement at fair value through profit or loss - for example, some embedded derivatives that are not separated from the host contract that is measured at amortised cost or contracts that are measured at fair value in their entirety as they did not fulfil the own-use exemptions.

Some Board members suggested that the wording should be tightened to reflect the concerns expressed above. Finally, the Board agreed with the general principles presented but agreed to define the eligibility more narrowly and to provide more examples.

 

Eligible hedged items: components of nominal amounts

The Board briefly discussed and agreed with the designation of components of nominal amounts as hedged items. Those requirements would reflect the current IAS 39 requirements.

Some Board members were concerned with clarity and suggested:

  • clarification of the terms 'portion' and 'proportion', and
  • inclusion of examples of nominal amounts in terms of monetary and physical metrics.

Some Board members discussed a broader issue related to proportions and their eligibility in connection with timing of the forecast transactions. The staff clarified that those issues would be addressed at a later stage as part of the effectiveness criterion debate.

 

Eligible hedged items: one-sided risk components

The Board agreed to carry forward the IAS 39 requirements that permit the designation of one-sided risk components as hedged items.

One Board member asked the staff whether they considered changing the prohibition to use written options as hedging instruments. The staff replied that this discussion should not imply any such change and should be limited to eligible hedged items. Moreover, they noted that they would discuss option strategies at a future meeting.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.