EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

EFRAG notes that companies in other industries, such as insurance and utilities, face similar difficulties to banks in using current hedge accounting requirements. As a result they are also interested in the development of a macro hedge accounting solution covering a variety of risks, such as commodity price risk and liquidity risk. EFRAG acknowledges the needs of these companies and encourages the IASB to undertake further analysis in order to conclude whether it is possible to develop a one-size-fits-all solution or whether 'a family' of macro hedging models is required.

EFRAG disagrees with the widening scope of this project, evidenced in the discussion paper, which is in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

EFRAG also notes that many banks manage their interest rate risk on a cash flow basis rather than a fair value basis and that many of the concepts in the discussion paper would fit more comfortably with a cash flow hedge model rather than a fair value model. They encourage the IASB to consider such a cash flow hedge model as part of the further work on the project.

For more information, see:

• EFRAG final comment letter (link to EFRAG website).
• Press release (link to EFRAG website).
• Our 17 April 2014 article on DP/2014/1.
• Our macro hedging project page.