IFRIC D22 — Analysis of comment letters and first redeliberations

Date recorded:

The staff presented to the IFRIC their analysis of comment letters received on the IFRIC's draft Interpretation D22 Hedges of a Net Investment in a Foreign Operation.

The staff noted that the majority of the comments received welcomed that IFRIC deals with this issue. It also noted that the areas of concern in the comment letters where the same as the ones the IFRIC aimed to address:

  • Which parent entity can hedge its net investment risk?
  • What can be hedged, that is, what is the amount eligible for hedge accounting and how it is determined?
  • Where the hedging instrument can be held and whether its location affects hedge effectiveness?

The staff pointed out that the fundamental issues have to be addressed firstly and after that minor and drafting issues could be dealt with.

On the first issue the IFRIC agreed that no further deliberation is necessary. One IFRIC member noted that the final Interpretation must be clear, why an entity can hedge twice from a risk management perspective, but not achieve hedge accounting treatment. Another IFRIC member pointed out that the words in the Interpretation must make clear that a foreign operation can be hedged for the same risk twice or more with two or more parents provided different net assets are hedged by these parents.

On the second issue, one commentator has raised the issue if the amount of net assets to be eligible for hedge accounting can be determined either on a 'sum of net assets of the individual foreign operations' basis or if it could be determined on a sub-consolidated net assets basis.

The IFRIC had a lengthy discussion on the topic and concluded that many concerns could be addressed by looking at a detailed example (to be drafted by the staff on the basis of an example from one of the comment letters). One IFRIC member noted that such an example must be clear about the reporting entity looked at and whether the focus is its separate financial statements or consolidated financial statements. It was also highlighted that the terminology must be consistent to avoid confusion. One IFRIC member noted that the principles that have already been agreed on must be revisited and probably be revised in the light of the conclusions drawn from such a detailed example.

The IFRIC agreed with the staff, and some IFRIC members highlighted again that all designations must be in accordance with the risk management policies and that the final Interpretation should not force entities to change their hedging strategies.

The IFRIC then discussed the third issue on the location of the hedging instrument. Some commentators expressed concern about the IFRIC's tentative conclusion that the location of the hedging instrument should not have influence on the effectiveness of the hedging relationship. This conclusion was based on a reference made to the Implementation Guidance on IAS 39 Financial Instruments: Recognition and Measurement (IAS 39 IG F.2.14).

The staff noted that they believe the conclusion made is correct but believe a more compelling rationale for this conclusion seems to be appropriate. It argued that the rationale rests on the purpose of net investment hedging and that this purpose should not be affected by the location of the hedging instrument.

The IFRIC members seemed to have a general sentiment that it should not matter where the hedging instrument is located. One IFRIC member expressed some concern about the recycling of the deferred gains or losses. Some IFRIC members also expressed the view that no matter what kind of hedging strategy an entity employs for risk management purposes, in the consolidated financial statements of the ultimate parent it should not make a difference.

The IFRIC agreed that these issues should also be addressed in the detailed example to be drafted by the staff as proposed in the discussion on the previous issue. One IFRIC member highlighted that the focus of the example should not be solely on the hedged item but the example should explicitly deal with hedging instrument. The next steps are that the staff will draft the detailed example and seek early input and feedback from the IFRIC members. This example will then be discussed at the March IFRIC meeting with the goal to reach final agreement on the principles of the draft Interpretation.

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