IAS 39: Financial Instruments Recognition and Measurement

Date recorded:

The staff presented the Board with an analysis of the comment letters received on the Exposure Draft (ED) on proposed amendments to IAS 39 Financial Instruments: Recognition and Measurement - Exposures Qualifying for Hedge Accounting. The exposure draft aims to clarify the Board's original intentions regarding risks and portions of financial instruments that are eligible for hedge accounting.

The staff informed the Board that it would provide an overview of the main issues raised by respondents, but that it would not express recommendations or ask the Board to make decisions. It noted that this would be part of a future Board meeting.

The staff provided the Board with some background information to the amendments and informed the Board that it commentators expressed overall support for the aim to clarify the requirements for hedge accounting under IAS 39. The staff noted that whilst most respondents supported the ED, they did so only as it represented a practical and interim solution, but would prefer a principle-based approach.

Further areas of concern were non-financial items and impact of the requirements in AG99E in the exposure draft on using purchased options.

On the issue of principles versus rules, one Board member noted that no one could really articulate a principle, and that this would be the reason one needs rules. The IFRIC chairman highlighted that IFRIC was not looking for a new principle but for the principle underlying the Board's original intentions when drafting IAS 39.

The staff noted that many entities would apply the requirements in IAS 39 regarding portions appropriately with the possible exception of hedge accounting with an option.

The staff then turned to the questions asked in the ED. The first question asked if constituents agree with the restriction of the risks eligible for hedge accounting. The main concerns were:

  • Having a closed list of risks
  • Contradiction with the IASB's goal of principle-based standard-setting
  • 'Missing' items: equity price risk denominated in foreign currency, inflation risk, and risks in non-financial items

Some Board members expressed their concern about extending the list and that some of the issues were very fact-specific.

The second question asked constituents to comment on the ED specifying the portion of cash flows that can be designated. Many constituents expressed concerns about the exclusion of non-financial items and proposed possible 'principles' in their comment letters. One Board member noted that those commentators would like to have a principle that would only require the existence of a correlation to qualify for hedge accounting.

The staff then proceeded to the third question in the ED. Constituents were asked if they expected major impacts on existing practice. The staff noted that overall respondents would not expect a major impact with the exception of the use of purchased options for hedge accounting (aswsuming the ED makes clear that the time value of the purchased option could not be deferred).

The fourth question asked constituents on the appropriateness of the transition provisions of the ED. Constituents commented that instead of full retrospective application it would be desirable to have prospective or limited retrospective application for the amendments.

One Board member pointed out that the only real issues were hedging with purchased options and inflation hedging. This Board member noted that the approach to hedging with purchased options that has evolved in practice was wrong in the first place and that this means retrospective application would be appropriate. The Board member noted further that the issue on inflation hedging was raised when such product were developed so the impact from retrospective application should be low.

The staff informed the Board that it would return at the April meeting to give the Board a plan how to proceed with the ED.

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