EFRAG draft comment letter on macro hedging

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

01 Jul 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB’s Discussion Paper DP/2014/1 ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’.

EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

However, EFRAG disagrees with the widening the scope of the project evidenced in the discussion paper and in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

Comments are due by 10 October 2014.

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