FRC proposes hedge accounting amendments to FRS 102

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15 Nov, 2013

The Financial Reporting Council (FRC) has today issued Financial Reporting Exposure Draft (FRED) 51: ‘Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland: Hedge Accounting’. The amendments widen the eligibility criteria for hedge accounting and introduce less onerous qualification criteria. Comments are invited by the FRC until 14 February 2014.

FRED 51 proposes limited amendments to FRS 102 in respect of hedge accounting with the following stated objectives: 

to allow entities to apply hedge accounting when this reflects their economic and risk management strategies, without onerous conditions; and

to use concepts and language that are, as far as possible, consistent with those included within IFRS 9 Financial Instruments, the International Accounting Standard Board's (IASB's) standard that includes hedge accounting . 

The amendments propose to replace the restrictive hedge accounting requirements in FRS 102 with a set of hedge accounting principles based on the IFRS 9 hedge accounting model.  Current FRS 102 requirements are narrow and do not permit hedge accounting in a number of common hedging scenarios leading to volatility in profit or loss when hedging instruments are transacted to reduce rather than increase risk. 

As a result of the proposed amendments, there will be more opportunities for entities to apply hedge accounting.  This will reduce profit or loss volatility from hedging instruments such as interest rate swaps, FX forwards and option contracts recognised and measured at fair value under FRS 102. 

In addition to broadening the eligibility criteria, FRED 51 also proposes to remove the requirement that an entity must expect the hedging instrument to be highly effective in offsetting the hedged risk in order to apply hedge accounting.  Instead, FRED 51 would require there to be “an economic relationship between the hedged item and the hedging instrument”. 

FRED 51 also uses consistent terminology with IFRSs, describing hedge relationships as cash flow hedges, fair value hedges and net investment hedges.

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