IAS 39 – Cash Flow Hedge Accounting of Forecast Intra-group Transactions

Date recorded:

This session was held as an educational session - no decisions were made.

The issues discussed relate to the fact that the old version of IAS 39 contained an exception to the principle that entities can obtain hedge accounting only for transactions that involve transferring risk to a party external to the entity. The old version of IAS 39 allowed the foreign currency risk in an intra-group monetary item to be designated as a hedged item in consolidated financial statements as long as the intra-group item results in an exposure to foreign exchange rate gains or losses that are not fully eliminated on consolidation under IAS 21. This is retained in the revised version of the standard.

However, IGC 137-14 under the old standard also allowed a forecast intra-group transaction to be designated as the hedged item in a foreign currency cash flow hedge in consolidated financial statements. The revised IAS 39 does not allow this.

The Board issued an exposure draft in July 2004 with proposals to allow a group to obtain hedge accounting in the consolidated financial statements by designating the hedge as a hedge of a highly probable forecast external transaction, and the linked forecast intra-group transaction could form part of the tracking mechanism for associating the hedging instrument with an external transaction.

Two issues arising from this were highlighted to the Board by the staff:

Issue 1

The first issue affects existing adopters of IAS 39. The version of IAS 39 (which includes IGC 137-14) currently being applied by existing users of IAS 39 allows hedge accounting for a hedge of foreign exchange risk of a highly probable forecast intra-group transaction. However, in 2005 groups will not be able to use hedge accounting for such transactions in consolidated financial statements. Moreover, they will also have to unwind the hedge accounting applied in previous periods, since the improved IAS 39 requires full retrospective application for existing adopters. The impact of this will be significant for many adopters.

An issue of communication arises because shortly after releasing 2004 financial statements, companies intend to let analysts know how the 2004 figures will be restated to comply with the revised IAS 39 and the other new Standards. Board members noted that the issue of communication to analysts was not the key issue (depending for instance on whether IGC 137-14 is reinstated).

Furthermore, the July 2004 ED will not have been agreed by 1 January 2005 and therefore cannot be implemented, with the potential impact that these entities will have to change their hedge accounting for a second time in six months if they are allowed to use the 'tracking mechanism' described above.

The Board stated that it was sympathetic to this problem. Various options were considered by the board including:

  • Reinstatement of the exception of the old version of IAS 39 (i.e. IGC 137-14).
  • Redesignation of hedges only prospectively, i.e. not restate the 2004 comparatives.

It was agreed that no decision would be made by the Board in this session as the ED has not yet been agreed by the Board.

Issue 2

This issue relates to both existing users and first time adopters of IAS 39. This issue arises because all hedging relations have to be designated at the inception of the hedge. In the absence of the final Standard on Cash Flow Hedge Accounting of Forecast Intragroup Transactions, the question arises as to what should groups designate as the hedge item at 1 Jan 2005 - highly probably forecast external transactions or highly probably forecast intra-group transactions? If a group does not designate a hedge in the 'right' way, it will not be able to obtain hedge accounting and will experience volatility in its consolidated profit or loss accounts.

The Board acknowledged that this is an issue and that it is sympathetic to this problem. However, it is unable to make a decision at this time, and the objective of this session was for the staff to alert the Board to some of the issues highlighted by the comment letters. The Board discussed the possibility of inserting in the December IASB Update an appropriately worded statement expressing the fact that the Board is sympathetic to the concerns of constituents on this issue.

It was agreed that the staff would perform their comment letter analysis and report to the Board in the February meeting when the issue would be discussed again by the Board. The staff expressed the view that it might be difficult for the Board to finalise amendments to the standard arising out of the Exposure Draft before the third quarter of 2005. Board members expressed the view that the Board should, if at all possible, try to finalise the amendment by 30 June 2005.

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