Hedge accounting

Date recorded:

Effectiveness - method of assessment

The Board continued its discussion on hedge effectiveness assessment from the previous day. This session focused on what method of assessment reporting entities should utilise in performing their effectiveness analysis and whether the IASB should prescribe or exclude any measurement techniques. The staff expressed concern with the use of percentage-based methods, particularly in respect of more complex hedging relationships as they felt the information provided was limited and did not provide economic meaning. However, the Board agreed that they should not proscribe any effectiveness methodology and would allow the percentage-based methods for effectiveness assessment.


Hedging eligibility - net positions

IAS 39 currently prohibits the hedging of a net position requiring reporting entities looking to hedge a net exposure to either enter two offsetting derivative instruments or to hedge a portion of one side of the gross exposure. The Board had previously agreed to develop a model to permit hedge accounting for net positions. In the May 2010 meeting, the Board tentatively decided that gains or losses arising from hedging of net positions should be presented in a separate line item within profit or loss (because the hedging instrument is mitigating the risk of two separate financial statement line items, the question was which line should reflect the hedging instrument offset).

During this meeting, the staff expanded the previously discussed example of a net hedge of FX risk of two firm commitments to a net hedge of FX risk of two highly probable forecast transactions which impact profit and loss during separate reporting periods. The staff proposed that hedge accounting for a net position of forecast transactions should be permitted. Some members of the Board expressed reservations with applying hedge accounting to a net position of a forecast transaction, primarily around the linkage between the two items. The example of hedging FX risk on future sales and cost of sales used in the staff example was converted to hedging FX risk on future sales and advertising expenses and whether those two items would be correlated enough to be considered a net position. Some Board members felt that if the correlation was sufficiently documented within the initial designation documentation that would help support why the risk management policy links the two transactions as a net position. One Board member felt that the model needed enhanced discipline around what could be considered a hedge of a net position which received support from other Board members.

The Board also discussed how to identify the hedged item when hedging groups of items. This is one of the building blocks to begin future discussions around portfolio hedging. The staff recommended that the net position can be identified as multiple gross hedge items which may offset within and across reporting periods. The Board felt that the same issues discussed in the discussion of the net hedge of a forecast transaction were relevant in this discussion as well.

While no official decisions were made, the Board expressed agreement for the general direction the staff was heading but cautioned to incorporate the suggestions and concerns expressed throughout the meeting.

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