exposure draft hedge accounting comments to be...
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Hedge accounting outreachExposure draft Hedge Accounting
Comments to be received by 9 March 2011
International Financial Reporting Standards
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
Introduction
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
3Principle-based standards
Principles Rules
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
4
Source of information (adapted from): www.iasplus.com
4Convergence ‘Map’
2011
2012
2010
2011
2012
2009
–
20112011
Permit from 2010
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
5Our work plan - Major Projects
Crisis (MoU)
Financial instruments
Consolidation
Derecognition
Other (Non MoU)
Insurance contracts
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Other (MoU)
Revenue recognition
Leases
Post-retirement benefits
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
6Consultation process 6
Discussion
paper
Exposure
Draft
Final
standardComment
analysis
Comment
analysis
Research:
Effective
date
9 – 15
months
9 – 15
months12 –18
months
Additional
input
Additional
input
Feedback
statement
2 year post
implementation
review
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
7
Exposure draft published December 2010.Comments due by 9 March 2011
Target to finalise general hedging Q2 2011
Macro hedging ongoing
Exposure draft published November 2009.A supplement to the exposure draft due
for publication in Q1 2011
Finalised October 2010
The project to replace IAS 39
Phase 1: Classification and
Measurement
Phase 2: Impairment
Phase 3: Hedge Accounting
International Financial Reporting Standards
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
Hedge Accounting Exposure draft
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
9Introduction
• The Board is considering hedge accounting comprehensively
• Overall approach:
– Use existing architecture
– Address specific problem areas
– Use clear and explicit principles
– Identify any exceptions clearly
– Consider application to portfolios
– Not opening hedge accounting for hedges of net investments in foreign operations
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
10Components of the hedge accounting model
Alternatives to
hedge accounting
Presentation and
Disclosure
Groups and net
positions
Discontinuation
and rebalancing
Effectiveness
assessment
Hedging instruments
Hedged items
Objective
Hedge accounting
(exposure draft)
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
11Objective
Risk management
objective:Seeks to link
risk management and
financial reporting
(top down)
Accounting
objective:Seeks to manage
timing of recognition
of gains or losses
(bottom up)
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
12Hedged items
Qualifying
hedged item
Entire item Component(identifiable and measurable)
Risk component Nominal component
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
13Hedged items: risk components
Benchmark
(eg interest
rate or
commodity
price)
Benchmark
(eg interest rate or
commodity price)
Variable
element
Fixed elementF
ina
ncia
l an
d n
on
-fin
an
cia
l
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
14Hedged items: risk components
• Proposals:
– LIBOR components in ‘sub-LIBOR’ interest bearing
financial instruments
– Designated risk component should not exceed the total cash
flows of the hedged item
– But: can still designate all the cash flows of the the hedged item
(for LIBOR risk!)
Retain the restriction in IAS 39
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
15Hedged items: aggregated exposures
Aggregated
exposure
IssuerCross-currency
Interest rate swap
Debt holderUS$
US$
€
€
€Interest rate swap
Not an eligible
hedged item
under IAS 39
Aggregated exposure—combination of: (a) another exposure and
(b) a derivative
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
16Hedged items: nominal components
• Proposals:
– Two types of nominal components:
– Percentage component (ie proportional to nominal amount of
item)
– Layer component
Type affects accounting outcome
– Layers eligible for groups of items and individual items
Exception: if a prepayment option exists (unless the strike price
is the fair value of the underlying)
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
17Hedging instruments
Hedging
instruments
Qualifying
instrumentsDesignation
Entire item with exceptions for:•Intrinsic value and time value
•Spot element and interest element
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
18Time value of options
Time value
of options
Transaction related
hedged item
Time period
related hedged item
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
19Hedge effectiveness
Hedge
effectiveness
Hedge effectiveness requirements
(qualifying criteria):
1. Objective of effectiveness
assessment is met
2. More than accidental offset
Measuring and recognising
hedge ineffectiveness
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
20Effectiveness assessment
• Proposals:
– Type of approach: objective-based
no bright-line (ie no 80%-125% or other range)
rebalancing of the hedge ratio can become necessary
– Method of assessment: purpose-driven
depends on characteristics of the hedging relationship and the
potential sources of ineffectiveness
– qualitative versus quantitative assessment
– method might need to change as circumstances change
– Direction: forward looking
at inception and on an ongoing basis
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
21Effectiveness assessment
Original
hedge ratio
Revised hedge ratio
New trend
Rebalancing
‘Perfect’ ratio with
benefit of hindsight
One (continuing) risk management and hedge
accounting relationship
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
22Effectiveness assessment
• Proposals:
– Objective of hedge effectiveness assessment
– Hedging relationship should produce an unbiased result and
minimise expected hedge ineffectiveness
Risk management determines the ‘optimal’ hedge ratio
ie no expectation that changes in the value of the hedging
instrument will systematically either exceed or be less than the
change in value of the hedged item such that they would produce a
biased result
this does not mean that a hedging relationship has to be expected
to be perfectly effective
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
23Discontinuation and rebalancing
Hedge relationship
does not meet the
effectiveness criteria
Risk management
objective remained
the same
The risk management
objective changed
Discontinue
hedge accounting
Other than
Accidental offsetAccidental offset
Discontinue
hedge accounting
Continue
Hedge accounting
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
24Discontinuation and rebalancing
• Proposals:
– Mandatory discontinuation
– When hedging relationship ceases to meet the qualifying criteria
– Discontinuation and restart
– Change in the risk management objective
– Adjusting a continuing hedging relationship
– Risk management objective remains the same but fail (or are about to fail) objective of hedge effectiveness assessment
– Revocation of designation prohibited
– When all the qualifying criteria are still met (including the risk management objective)
‘Rebalancing’
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
25Rebalancing
• Proposals:
– Rebalancing
– response to changes in the relationship between hedging
instrument and hedged item
evaluate whether changes in the extent of offset are:
– fluctuations around the hedge ratio versus
– an indication that the relationship between hedging
instrument and hedged item changes
– Continuation of the existing hedging relationship
different implications depending on whether hedging
instrument or hedged item is adjusted
– Update documentation
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
26Discontinuation
• Proposals:
– Partial discontinuation
– Consequence of some rebalancing scenarios
– Forecast transactions: insufficient headroom
– Some of the hedged volume is no longer highly probable
– Hedging relationship continues for volume that is still highly
probable
– History of downward adjustments of hedged forecast
volumes would affect the ability to forecast occurrence of
similar items
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
27Groups and net positions
Apply hedge
accounting model
for individual
items in addition to
meeting additional
requirements for:
Eligibility of a group
of items as
hedged items
Designation of a
component of a
nominal amount
Presentation Nil net positions
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
28Hedged items: groups and net positions
• Proposals:
– Net positions as eligible hedged items:
– Conditions:
– Consistent with risk management
– Items identified on a gross basis
– √ Fair value hedges
– √ Cash flow hedges:
Only if offsetting cash flows affect profit or loss (in their
entirety) in the same period
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
29Hedged items: groups and net positions
• Proposals:
– Change in fair value of individual hedged items need not
be proportional to that of the group
– Permit layer approach (eg bottom layer) to identifying
hedged items from a group
– Separate line item presentation of hedging instrument
gains or losses for net position hedges if group has
offsetting risks
– For example sales and purchases hedged for FX risk or interest
revenue and expense
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
30Presentation
Presentation
Cash flow hedges Fair value hedges
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
31Presentation: fair value hedges
• Balance sheet
– Hedged item
– Hedge adjustment (change in value of the hedge item)
– Hedging instrument
• Income statement (and OCI)
– Hedge ineffectiveness (income statement)
– Change in the hedged item (OCI)
– Change in the hedging instrument (OCI)
– Hedge ineffectiveness (OCI)
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
32
Total entity risk exposure
(no specific disclosure requirements)
Disclosures: scope
Proposed scope for hedge accounting disclosures
Hedged exposure
(Exposure to
risks being
hedged)
IFRS 7
Disclosure
requirements
Significance of
financial instruments
for financial position
and performance
Nature and extent of
risks arising from
financial instruments
Entity’s exposure
attributable to the
hedged risk
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
33Disclosures proposed
Hedge accounting
disclosures
Risk management
strategy
The amount, timing
and uncertainty of
future cash flows
Effect of hedge
accounting on the
primary financial
statements
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
34Alternatives to hedge accounting
Alternatives
‘Own use’ scope exception
in IAS 39
Credit derivatives
(not proposed)
3 Alternatives
Proposed
consequential
amendment
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
35Hedges of credit risk using credit derivatives
• Issue:
– Difficult to isolate and directly measure the credit risk
component for hedge accounting purposes
– Fair value option too restrictive and not available for
most loan commitments
• Proposals:
– Board considered elective fair value accounting for part
of the nominal amount of the credit exposure
– Board does not propose elective fair value accounting
due to complexity
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
36Knock-on effects of other project phases
• Proposals:
– Embedded derivatives
– embedded derivatives are eligible hedging instruments only if
separated from their host contract
no longer available under IFRS 9 for asset host contracts
– Equity investments for which the OCI presentation
alternative is elected
– hedge accounting is not available for instruments designated at
fair value through OCI
– Impairment
– interaction of expected loss model with ‘highly probable’
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
37Transition and effective date
• Proposals:
– Transition requirements
– Prospective application of new hedge accounting model to allhedging relationships
– Hedging relationships that qualified under IAS 39 and qualify under the new model will be treated as continuing hedging relationships
– No restatement of comparatives
– Effective date
– Annual periods beginning on or after 1 January 2013 with earlier application permitted
– all existing IFRS 9 requirements must be adopted at the same time (or already have been adopted)
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
38Where we are and next steps…
• Exposure draft issued in Q4 2010
• Board continuing discussions on macro hedging
• Outreach activities
• Re-deliberations
• IFRS in Q2 of 2011
2010 2011
Q3 Q4 Q1 Q2 H2
Hedge accountingED
IFR
S
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
39Additional information
• The hedge accounting project page on the IASB website (www.ifrs.org) contains additional information on:
– Disclosures
– Hedge accounting mechanics
– Groups and net positions
– Risk components
– Effectiveness criteria
– Rebalancing
– Time value of options
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
40Questions or comments?
Expressions of individual views
by members of the IASB and
its staff are encouraged. The
views expressed in this
presentation
are those of the presenter.
Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.
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