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Financial instruments — Macro hedge accounting

Background

This project originally formed part of the IASB's comprehensive project on financial instruments, but is subsequently being treated as a separate project by the IASB. 

This project considers risk management that assesses risk exposures on a continuous basis and at a portfolio level (i.e. dynamic portfolio hedging). This type of risk management strategy tends to have a time horizon (e.g. five years) over which exposures are hedged. Consequently, as time passes new exposures are continuously added to the hedged portfolio and other exposures are removed from it.

This area of accounting is complex and currently only accommodated to a limited extent in IAS 39 Financial Instruments: Recognition and Measurement which includes a macro fair value hedging model for interest rate risk.  The IASB’s objective is to consider an alternative macro hedging model that will ultimately replace the macro fair value model in IAS 39 and have wider applicability to other risks.

The existing hedge accounting requirements in IAS 39 are often considered by users and preparers of financial statements to be complex and not reflective of an entity’s risk management activities, nor to what extent those activities are successful in meeting the entity's risk management objectives. Many also find the requirements in IAS 39 excessively rule-based, sometimes resulting in arbitrary outcomes.

Hedging of open dynamic portfolios introduce complexity to the accounting for such hedges. Changes could be addressed, like they are under IAS 39, by treating them like a series of closed portfolios with a short life (i.e. by periodic de-designation of the previous closed portfolio of items and re-designation of a revised closed portfolio of items). However, this gives rise to complexities regarding tracking, amortisation of hedge adjustments and reclassification of gains or losses deferred in accumulated other comprehensive income (in the case of portfolio cash flow hedging). Furthermore, it may be impractical to align such an accounting treatment with the way in which the exposures are viewed from a risk management perspective, which may update hedge portfolios more frequently (e.g. daily).

The IASB noted that this is a complex topic that warrants through research and input from constituents.  Accordingly, the Board decided to separately deliberate accounting for macro hedging as part of its active agenda.  By separating this phase of the project from the phase on general hedge accounting, the IASB was able to complete the general hedge accounting section of IFRS 9 Financial Instruments more quickly*.  The IASB has also retained the existing macro hedge accounting requirements under previous IFRSs whilst this project is finalised. Whilst the macro hedge accounting project is on-going, adopters of IFRS 9 may, as an accounting policy choice, continue to apply the macro fair value hedge accounting model for interest rate risk in IAS 39.

* The IASB issued the finalised version of IFRS 9 Financial Instruments in July 2014, with an effective date of 1 January 2018.

 

Current status of the project

On 17 April 2014, the IASB published discussion paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. Although the paper focuses on the example of portfolio interest rate hedging by banks, the concepts discussed can apply to any entity that hedges on a dynamic portfolio basis for any risks (e.g. it is relevant for non-financial corporates that hedge commodity risk on a portfolio basis). A discussion paper was published on 17 April 2014. A second discussion paper is expected not before 2016.

 

Project milestones

DateDevelopmentComments
17 April 2014 Discussion Paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging published Comments requested by 17 October 2014

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