Many of the comments received referred to significant side effects of the carve-out, which were also noted by members of EFRAG.

In relation to the carve-out of the fair value option for liabilities the concerns are that the carve-out will create artificial volatility for many entities in Europe and the effect may be serious for those entities and countries affected. We have in the appendix explained these issues more fully, but we can mention the cases of economically or contractually linked or matched financial assets and liabilities where artificial volatility is introduced if assets and related liabilities are not accounted for on the same basis. Examples are unit linked instruments and the Danish mortgage institutions.

In relation to hedge accounting the effect of the carve-outs is not just to allow fair value hedging of core deposits on a portfolio basis but to extend the range of items that can be designated as hedged items and to relax the effectiveness test requirements for all hedges. The effects of their relaxation are significant.

In practice the tightening of the provisions in relation to the fair value option prevents entities from using certain sensible accounting practices that they would be able to use under the full IAS 39. On the other hand the relaxation of the effectiveness test for hedging transactions will allow entities to apply accounting that the full IAS 39 would not.