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Financial Instruments: Hedge Accounting

Date recorded:

Eligibility of financial instruments managed on a contractual cash flow basis in a fair value hedge

The Board discussed whether in principle any items measured at amortised cost still qualified as hedged items for fair value hedge accounting.

The Board agreed that hedge accounting for fair value hedges for instruments that are managed on a contractual cash flow basis did not contradict this classification condition, and said there are situations where such hedge accounting was appropriate. One Board member noted that financial institutions used fair value hedges to lock in their margin and thus to stabilise the yield. In his opinion that would not contradict the classification condition.

On the other hand, several Board members remained unconvinced, as they feared that hedge accounting for fair value hedges in such situations might lead to structuring opportunities and would represent create a synthetic yield as opposed to contractual yield that was the basis of the classification condition.

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