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Amendments to IAS 32 and IAS 39

Date recorded:

Hedge accounting for a portfolio hedge of interest rate risk

The Board agreed (vote 10-4) that the hedge instrument should be designated as hedging a percentage of the net exposure. Therefore, ineffectiveness may occur when the fair value of the net exposure increases (under hedged) or decreases (over hedged).

Core deposits

The Board concluded that core deposit liabilities may be included in the time bucket management expects the deposits to repay if that time bucket is in a net asset position. The Board decided (vote 11-3) that demand time deposits can be subjected to a fair value hedge only until the earliest date on which the customer can demand repayment. The reasons behind these conclusions will be added in the basis of conclusion.

Measuring effectiveness

The Board discussed methods to assess hedge effectiveness and decided on the following. The initial hedge ratio is applied to the revised estimate of the amount in the time period. For example, assume an entity had estimated that it had 100 of assets in a time period and had decided to hedge an amount of 20. It then re-estimates the assets in this time period as being 120. Under this method, the initial hedge ratio is 20% (20/100 x 100). This percentage is applied to the revised estimate of the assets in the time period of 120, to give a revised hedged item of 24. Ineffectiveness arises on the change in fair value of this revised hedged item (24) that is attributable to the hedged risk, and the change in fair value of the hedging derivative (that would likely have a notional principal of 20).

Effective date

The Board agreed the effective date should be for financial years January 2005 with beginning or after 1 January 2005 and early adoption be permitted. The effects of this Standard should be applied prospectively.

Comment period

The staff proposed a 60 days comment period in order to have comment in by November 2003. The Board realised that it was a short period but said it was the only one possible to meet the Board's March 2004 deadline for issuance of the final IFRS. The Board decided it will put the ED on its website as soon as it is ready to achieve a comment period closer to 90 days.

Transition - IAS 39

First time adopters:

IFRS 1 prohibits retrospective application and requires prospective treatment from January 2001 for derecognition. The Board decided to change the date so that the derecognition provision shall be applied from 1 January 2004, prospectively. Retrospectively application is permitted.

First time adopters (2005 only):

The Board decided that the comparative figures are not required to be restated from local Gaap for IAS 39 only (other than derecognition requirements). Therefore, the Balance sheet and the income statement reconciliations required under IFRS 1 will not include financial instruments.

Entities already under IFRS

The Board agreed that entities already under IFRS should apply the provisions for derecognition prospectively similar to FTA and retrospective for the other requirements.

Transition - IAS 32

For all entities, the effective date will be for financial years beginning on or after January 2005 with retrospectively application required (with prohibition of prospective application).

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.