At its January meeting the IASB discussed issues raised on the draft hedge accounting requirements for IFRS 9 relating to macro cash flow hedging as a result of which the board requested an analysis of the scope of the hedging chapter of IFRS 9 and its interaction with macro hedging activities. A Staff paper containing this analysis together with papers considering due process, re-exposure and permission to draft were discussed at this meeting.

Scope and interaction with macro hedging activities

The Staff summarised the issue and the options open to the board, noting that a lot of the unease around this topic was due to incorrect perceptions relating to proxy hedges and that no practical examples of problems were provided during their outreach. The Staff recommended that the Board confirm the scope of the draft IFRS 9 hedge accounting requirements i.e. only provide a scope exception for fair value hedges of the interest rate exposure of a portfolio of financial assets and liabilities.

The majority of board members found it difficult to see the issue, but could see how they may have contributed to the perceived issue by separating consideration of the (fair value) macro hedge accounting model from the general hedge accounting model.

A number of Board members expressed frustration that this issue which may impact only a handful of preparers in the EU was delaying the finalisation of, and so adoption of, requirements for preparers in other regions. Although a few suggested further outreach to better understand the issue, the majority felt it was important to complete the project as soon as possible. The need to quickly resolve the issue was also emphasised by the Chairman.

Only one Board member favoured addressing concerns by introducing a narrow scope exemption, specifically aimed at excluding macro cash flow hedges. The Staff reiterated their concerns around being able to adequately define such an exemption, and these concerns were echoed by other Board members.

Most Board members agreed that if a change were to be made they would favour a providing general choice between applying the hedge accounting requirements of IAS 39 instead of those of IFRS 9. The Staff stated that they believed given this choice most preparers would choose to apply the requirements of IFRS 9, as the advantages in other areas would out way any disadvantage of applying the requirements to macro cash flow hedges. However, a number of Board members felt that preparers, including those not undertaking any macro hedging activities, would use this option to delay adoption of the IFRS 9 requirements. It was raised that the option to apply the hedging requirements of IAS 39 would need to remain in place until the mandatory effective date of the macro hedging requirements and it was generally acknowledged that this could result in the co-existence of two different hedging models for a substantial period of time. A number of Board members were very concerned about the implications of this on comparability.

Further concerns were raised about issues that may arise in relation to applying the IAS 39 hedge accounting requirements in combination with the requirements of IFRS 9 in other areas, and the time that will be required to investigate these issues. In addition, it was noted that if the IAS 39 model were to continue to be used, the practice issues noted during the development of IFRS 9 (e.g. the treatment of cross currency basis) would need to be addressed.

It was agreed with little discussion that the inclusion of a general choice between applying IAS 39 instead of IFRS 9 for hedge accounting need not impact the existing scope exception for fair value macro hedges of interest rate risk.

The Board tentatively decided, with a majority of ten votes to six, to provide a general choice between applying IAS 39 instead of IFRS 9 for hedge accounting.

Due process considerations, re-exposure and permission to draft

The Staff presented a paper analysing the IASB’s compliance with due process requirements over the course of the general hedge accounting project and another paper discussing the due process requirements relating to re-exposer and requesting permission to begin drafting the Ballot Draft of the new IFRS 9 incorporating the final version of Chapter 6 Hedge Accounting. The Staff believed that the Board have complied with the requirements, and stated that they had previously presented their papers to the Due Process Oversight Committee (DPOC). The Staff explained that the DPOC agreed with the staff’s conclusions and further that this conclusion would not be impacted by the decision to amend the scope discussed above, i.e. that this decision would not result in the need to re-expose. However, it was noted that the DPOC had advised caution in the use of review drafts in future.

One Board member stated that he did not believe due process had been followed, because had the proposal to allow the two hedge accounting models to be applied in parallel for a prolonged period been exposed the feedback received would have been very different. He also reiterated his concerns relating to comparability, the interaction the IAS 39 hedging model the requirements of IFRS 9 and the issues noted with IAS 39 hedging model. That Board member stated that he would consider dissenting from the proposal on these grounds, and another two Board members said that they would also consider doing so for the same reason.

When put to the vote, the Board decided by fourteen votes to two, that all necessary due process requirements had been met and by twelve votes to four to grant permission to the Staff to begin drafting the Ballot Draft.