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Dynamic risk management

Date recorded:

Agenda Paper 4A: Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging — Due process

The Visiting Fellow informed the Board that the first part of the session concerned the due process for the project on dynamic risk management (DRM). The staff had noted significantly conflicting messages in the responses to the discussion paper (DP) issued in 2014, particularly related to the objectives of the project. The staff believed that the insights the IASB had gathered from the public consultation on the DP were not necessarily sufficient to move to an exposure draft (ED). The staff therefore suggested leaving the project on the research agenda and issuing a second DP. The staff also recommended that the Board did not close the possibility to move directly to an ED.

The Chairman expressed disagreement with leaving the possibility for an immediate ED open. A Board member recommended clarifying the purpose of the project. He said that the DP clarified the problem but the Board was still struggling to find a solution. Another Board member said that the interaction with the financial statements presentation project, now renamed the primary financial statements project, should be considered.

The Board agreed with the staff recommendation to leave the project on the research agenda.

Agenda Paper 4B: Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging – The process to identify information needs

The staff had been asked at the May meeting to examine how the information needs of constituents concerning DRM activities could be addressed through disclosures. The objective of the agenda paper was to set up a process to identify those information needs. They had examined in the paper what useful information concerned, whose information needs were the focus, why the information was needed and what sources for the information could be. The Senior Technical Manager asked the IASB for their input on the process and whether they would like comparability between entities that undertook DRM activities and those that did not.

One Board member opened the discussion by saying that the IASB would have to decide whether the focus should be narrow and on hedge accounting or whether it should be broader and on disclosures. She believed that the constituents had asked for the former. Although she preferred the latter focus, she expressed concern that it was unclear whether the Board had a mandate for that. Another Board member agreed that the focus should be on disclosures as this was the only way, in his view, to make the interest rate risk of an entity more transparent. He said that the scope and the objective of the project should be defined, however this would be a very big project and he thought it was not be the right time to undertake this project as IFRS 9 had just been finalised.  The Technical Director understood those concerns and said that the project needed to find the appropriate entry point. Possible entry points could be DRM activities or interest rate risk exposure in general. But even if the latter were the entry point, this would not mean that the entire risk management should be disclosed. A Board member replied that this task would be difficult as DRM activities required different disclosures than micro hedging or proxy hedging. The Chairman said that using general interest rate risk exposure as an entry point would be too broad as every company was exposed to interest rate risks. One Board member warned that the IASB should not align the disclosures to the very extensive information required by regulators. A fellow Board member said that the limit between financial statement risk disclosures and business risk disclosures should be considered. The Technical Director acknowledged an overlap between those two kinds of risks but said that the focus was on interest rate risk disclosures as IFRS 9 addressed other risks appropriately.

One Board member said that the problem with the portfolio risk approach (PRA) was that the Board had tried to solve too many problems in one go. He suggested extracting the problems and dealing with each of them separately. He also said that the revaluation approach suggested by the DP might not be the right solution. He also said that behaviouralisation with regard to core deposits was actually a form of proxy hedge accounting and therefore not a good solution either. Several Board members agreed with that. The Technical Director also agreed but said that all of the problems were linked and they needed to be under a common umbrella. One Board member said that it would, for example, be useful information to know why companies entered into fixed-for-variable interest rate swaps although variable loans were on the decline with falling interest rates.

A Board member said that he had been under the impression that the Board decided to discuss disclosures first and then think about recognition and measurement. A fellow Board member suggested waiting to see what the Basel Committee would propose as they considered the same issues as the IASB.

When taking a vote, all Board members agreed that the comparability between those entities who undertook DRM and those who did not should be considered. None of the Board members objected to the proposed process to identify information needs.

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