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FRC hedge accounting proposals would move FRS 102 further away from the IFRS for SMEs

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18 Nov 2013

The Financial Reporting Council (FRC) has issued Financial Reporting Exposure Draft (FRED) 51: ‘Draft amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland: Hedge Accounting’. The amendments would widen the eligibility criteria for hedge accounting.

In March 2013, the UK’s Financial Reporting Council (FRC) published FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which will replace current UK GAAP with effect for periods beginning on or after 1 January 2015. FRS 102 is derived from the IASB’s IFRS for SMEs but incorporates changes made by the FRC, one of which widens the scope of the standard significantly compared to the IFRS for SMEs.

At the time of the publication of the standard, the FRC already announced that the hedge accounting guidance in FRS 102 was not considered sufficient for the larger companies electing to apply the standard instead of full IFRSs. One of the aims behind publishing the proposed amendments is therefore relaxing the simple, yet prescriptive existing requirements that the FRC feels may 'unduly' restrict the application of hedge accounting.

The FRC's overriding objective in setting accounting standards is to enable users of accounts to receive high-quality understandable financial reporting proportionate to the size and complexity of the entity and users' information needs.

The draft hedge accounting amendments to FRS 102 were developed from the IASB's review draft of the parts of IFRS 9 Financial Instruments relating to general hedge accounting. The finalised IASB requirements regarding hedge accounting have not yet been published but are expected to be issued in the fourth quarter of 2013.

The IASB itself decided not to integrate the new hedge accounting proposals into its Exposure Draft of suggested amendments to the IFRS for  SMEs published in October 2013. The Board decided that not necessarily all changes made to full IFRSs would be copied to the IFRS for SMEs; rather, a change in full IFRSs would cause the Board to consider whether (and, if so, how) the current version should be amended after the effects of changes have been observed in practice. The IASB is also extremely wary regarding incorporating not finalised pronouncements into the IFRS for SMEs as Board decisions might take a different route at the end and would leave the IFRS for SMEs even further from existing IFRS requirements.

Comments on FRED 51 are invited by 14 February 2014. The following information is available on the FRC website:

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