DOCSLIB.ORG

Hedge Accounting Stay with IAS 39 Or Move to IFRS 9?

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Hedge Accounting Stay with IAS 39 Or Move to IFRS 9? FINANCIAL SERVICES Hedge Accounting Stay with IAS 39 or move to IFRS 9? 5. Oktober 2015 Disclaimer The following slides were prepared to be held in combination with spoken word. The slides standing alone might not give a comprehensive and correct picture of the topic. The slides were prepared with care and due diligence. However they are no basis for any business decision and FAS AG does not take any responsibility for potential mistakes and losses due to any information taken from the slides. The slides were prepared by FAS AG and shall not be used or copied for any business purpose without explicit permission by FAS AG © FAS AG 5. Oktober 2015 2 Agenda Background and historic development of hedge accounting under IFRS 9 Requirements for hedge accounting under IFRS 9 Implementation of hedge accounting under IFRS 9 Discussion © FAS AG 5. Oktober 2015 3 Objective of hedge accounting Reasons to overhaul hedge Objective accounting The objective of hedge Stronger alignment of risk accounting is to represent in management and (hedge) the financial statements the accounting effect of an entity’s risk Too rule based IAS 39 management activities when rules they use financial instruments Development in risk to manage exposures arising management practice from particular risks and Insufficient disclosures those risks could affect profit or loss © FAS AG 5. Oktober 2015 4 Historic development Mai 21th 2014: May 30th 2012: Nov. 19th 2013: Decision to first Decision to ??th of ?? 20?? Completion of focus on decouple macro Standard on IFRS 9 phase III: disclosures and hedging from macro hedge hedge issue an new IFRS 9 and issue accounting accounting discussion paper in an own standard the future Dec. 9th 2010: April 17th 2014: January 1st 2018: Exposure draft Discussion paper July 24th 2014: First time on hedge on accounting for IFRS 9 was application of IFRS accounting was macro hedging issued 9 – including new issued was issued hedge accounting? © FAS AG 5. Oktober 2015 5 Feedback on portfolio revaluation approach discussion paper (macro hedging) Is the PRA overall rather appoved or Feedback by industry rejected? 50 37 19 17 16 18 25 10 9 4 0 25% 62% 13% approved rejected no answer Question15 – On which part of the Feedback by region portfolio the PRA should be applied? 100 84 75 50 18 25 12 5 9 9% 64% 2% 25% 3 0 Comprehensive only risk mitigation other No answer Choice to apply IFRS 9 or to stay with IAS 39 (hedge accounting) Apply IAS 39 hedge accounting rules for all types of hedges (micro/ macro, CFH/FVH) Apply general hedge accounting rules after macro hedge is established (no matter if macro hedge rules itself are applied) 1st of January 2018 Apply IFRS 9 hedge accounting rules on micro hedge relationships Apply IAS 39 for portfolio fair value hedges until new macro hedge standard is developed (then change to macro hedge) Agenda Background and historic development of hedge accounting under IFRS 9 Requirements for hedge accounting under IFRS 9 Implementation of hedge accounting under IFRS 9 Discussion © FAS AG 5. Oktober 2015 8 Changed requirements for hedge accounting under IFRS 9 Linked to risk management practice Rebalancing Designation of non-derivatives Cost of hedging IFRS 9 Combination of derivatives and non Discontinuation of hedge accounting derivatives as hedging items hedge Designation of risk components of non accounting Domination of credit risk financial hedged items requirements Reversible fair value option for credit Designation of layers risk Effectiveness assessment Designation of net positions © FAS AG 5. Oktober 2015 9 Link to risk management Fair value hedge Cash flow hedge XYZ Bank XYZ Bank XYZ Bank 5% loan 3M Euribor 10Y debt 10Y 3M Euribor 5% loan 3M Euribor 5% loan 10Y 10Y debt 10Y 4% fix vs 3M Euribor payer swap debt 10Y 4% fix vs 3M Euribor payer swap 4% fix vs 3M Euribor payer swap Generaly fair value Designation of net hedge is in line with derivatives with “matching” economic PV based view hedged items usually is not Risk management on in line with PV based risk portfolio level does not management and treasury differ between hedged Economic relationship between all three “In the case of cash flow item and hedging item positions hedge accounting, so- Economic micro positions called ‘proxy hedging’ is still (e.g. asset swaps) are in Risk management approach usually to an eligible way to de- line with risk swap any fix cash flows to 3M / 6M floating signate a hedged item in management Risk management only looks on the PV of accordance with IFRS 9 as total net cash flow long as the designation Net interest margin is 1% reflects risk management” Actual treatment is unsure but on a general level it might be difficult to show a link between risk management and hedge accounting for the whole business – a combination between IAS 39 PFVH and IFRS 9 micro hedge might be necessary © FAS AG 5. Oktober 2015 10 Domination of credit risk Insignificant credit risk What is the relevant trigger The effect of credit risk means that for credit risk domination even if there is an economic Historic relationship between the hedging General possibility instrument and the hedged item, the Likely event level of offset might become erratic. Is there a link between This can result from a change in the impairment stages and credit credit risk of either the hedging risk domination? instrument or the hedged item that is When is credit domination of such a magnitude that the credit risk reached? dominates the value changes that Significant credit risk Changing signs in result from the economic relationship. total FV changes A level of magnitude that gives rise to Full Offsetting FV dominance is one that would result in changes the loss (or gain) from credit risk Significant counter frustrating the effect of changes in the effect underlyings on the value of the Transfer from hedging instrument or the hedged impairment stage item, even if those changes were 2 to 3? significant. Total FV changes hedging item Total FV changes hedged item FV changes hedged item due to hedged risk FV changes hedged item due to credit risk FV changes hedging item due to hedged risk FV changes hedging item due to credit risk Actual implementation of domination of credit risk is open but it can be assumed that for most hedge relationships this should not reduce the applicability of IFRS 9 © FAS AG 5. Oktober 2015 11 Cost of hedging Transaction related hedged item (e.g. purchase of a bond) Recognition in OCI until transaction occurs Reguatory Under IFRS 9 the following Recognition in P/L when transaction affects treatment is components might be excluded P/L resp. recognition in initial acquisition cost from designation: open time value of options 50 Net FV hedging Forward elements of forward instrument 0 contracts 1 2 3 4 5 6 7 FV hedged item FX basis spreads of financial -50 instruments AC cost of hedging -100 Cost of hedging Instead of recognition in profit or componente loss the change in those -150 components might (for options has to) be recorded depending Time period related hedged item (e.g. hedge of Definition of on the hedged item FX risk of an existing bond) rational basis Recognition in OCI Amortization of initial amount into P/L on is missing rational basis Recognition of changes of cost of hedging in P/L and rational amortization reduces P/L volatility and increases effectivity – regulatory treatment is still open © FAS AG 5. Oktober 2015 12 Changed requirements for hedge accounting under IFRS 9 Linked to risk management practice Rebalancing Designation of non-derivatives Cost of hedging IFRS 9 Combination of derivatives and non Discontinuation of hedge accounting derivatives as hedging items hedge Designation of risk components of non accounting Domination of credit risk financial hedged items requirements Reversible fair value option for credit Designation of layers risk Effectiveness assessment Designation of net positions © FAS AG 5. Oktober 2015 13 Agenda Background and historic development of hedge accounting under IFRS 9 Requirements for hedge accounting under IFRS 9 Implementation of hedge accounting under IFRS 9 Discussion © FAS AG 5. Oktober 2015 14 Remaining problems for hedge accounting under IFRS 9 Objective Alternatives to Internal hedge Hedged items accounting deals Full Disclosure Presentation Hedge Hedging of and disclosure Accounting instruments economic hedging Groups and Effectiveness net positions assessment Dynamic risk Dicontinuation and manage- rebalancing ment © FAS AG 5. Oktober 2015 15 Issues to consider for a change to IFRS 9 Cost of implementation (processes, tools, etc.) to move to IFRS 9 IAS 39 adoption on new categorization will also require adjustments of current process General policies, workarounds and methods under IAS 39 can generally be kept Unsureness about praxis development and definition of terms and actual requirements (also chance to shape praxis requirements) Not sure what choices and hedges may be revoked on first time application of macro hedging Schedule for macro hedge development is unclear (DP later than 6 month) Agenda Background and historic development of hedge accounting under IFRS 9 Requirements for hedge accounting under IFRS 9 Implementation of hedge accounting under IFRS 9 Discussion © FAS AG 5. Oktober 2015 17 Contact © FAS AG 5. Oktober 2015 18 Improve Your Opportunities.
Load more

Recommended publications
  • Update on FASB's Hedging Rules
    Update on FASB’s Hedging Rules In 2017, FASB issued Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments made targeted—but substantial—changes to better align hedge accounting with management’s risk management activities and reduced the cost and complexity of applying hedge accounting. Many companies took advantage of early adoption, giving rise to several implementation and operational questions that FASB recently addressed in a set of technical corrections, ASU 2019-04. Hedge accounting is an option and will continue to be a somewhat difficult area for preparers, auditors and users, notwithstanding the recent simplifications. FASB has a separate project underway covering the “last-of-layer” method, which makes it easier to hedge prepayable financial instruments. This project is in the initial deliberation stage, and no time frame is set for an exposure draft. FASB also has added a project to address the operational challenges of migrating to a new benchmark rate once the London Interbank Offered Rate (LIBOR) is phased out in 2022. Removing and replacing LIBOR will be complicated with the biggest effect on long-dated contracts with a maturity after the phaseout. For derivatives contracts, master agreements between counterparties likely will have to be amended or replaced. Retail mortgages, home equity lines of credit and any other consumer or business debt tied to LIBOR may have to be amended unless a back-up interest rate index is referenced in the original documentation. Mortgage-backed securities, loans and floating rate bonds all tied to LIBOR will have to be addressed contractually and—with regard to deal-specific covenants—may require consents from the owners of these securities.
    [Show full text]
  • A Practical Guide to IFRS 7 for Investment
    Asset Management A practical guide to IFRS 7 For investment managers and investment, private equity and real estate funds April 2010 PricewaterhouseCoopers’ IFRS and corporate governance publications and tools 2010 IFRS technical publications IFRS disclosure checklist 2009 IFRS manual of accounting 2010 Outlines the disclosures required by all IFRSs PwC’s global IFRS manual provides published up to October 2009. comprehensive practical guidance on how to prepare financial statements in accordance with IFRS. Includes hundreds of worked examples, extracts from company reports and model financial statements. IFRS pocket guide 2009 Provides a summary of the IFRS recognition and measurement requirements. Including currencies, A practical guide to IFRS 8 for real estate entities assets, liabilities, equity, income, expenses, business Guidance in question-and-answer format addressing combinations and interim financial statements. the issues arising for real estate entities when applying IFRS 8, ‘Operating segments’. Illustrative IFRS financial statements 2009 – investment funds Updated financial statements of a fictional investment fund illustrating the disclosure and A practical guide for investment funds presentation required by IFRSs applicable to to IAS 32 amendments financial years beginning on or after 1 January 2009. 12-page guide addressing the questions that are The company is an existing preparer of IFRS arising in applying the amendment IAS 32 and IAS 1, financial statements; IFRS 1 is not applicable. ‘Puttable financial instruments and obligations arising in liquidation’, with a focus on puttable instruments. Illustrative IFRS financial statements 2009 – private equity A practical guide to new IFRSs for 2010 Financial statements of a fictional private equity 48-page guidance providing high-level outline of hte limited partnership illustrating the disclosure and key requirements of IFRSs effective in 2010, in presentation required by IFRSs applicable to question and answer format.
    [Show full text]
  • Hedge Accounting FBS 2013 USER CONFERENCE
    9/12/2013 Hedge Accounting FBS 2013 USER CONFERENCE Purpose of a Hedge • Provide a change in value of the hedging instrument in the opposite direction of the hedged item. • For tax purposes, the gains or losses on from hedging activities are recognized when hedges are lifted • For accounting purposes, hedging gains/losses are recognized in the period the gains or losses occur – Hedging is consider normal business operation so should be matched to gross revenue and expense 1 9/12/2013 What is Hedging? • Hedging is a risk management strategy that attempts to offset price movements of owned assets, planned production of a commodity or good, or planned purchases of commodity or good against a derivative instrument (which generally derives its value from an underlying physical commodity). • It is not an attempt to make money in the futures and options markets, but rather an attempt to offset price changes in the cash market, thereby protecting the producers net income. What is Not Hedging? • Speculation – Taking a futures or options position in a commodity not owned or produced. – Taking the same position in the futures or options market as exists (or will exist) on the farm. • Forward contracts – Fixed price, delayed or deferred price contracts, basis contracts, installment sale contracts, etc. 2 9/12/2013 Tax Purposes • May be different from GAAP • An agricultural producer normally reports hedging gains or losses when the hedge is closed (similar to GAAP). • However, if the producer meets certain requirements, they can elect to report all hedging gains and losses on a mark- to-market basis (i.e.
    [Show full text]
  • Exploring Hedge Accounting Changes and Their Impacts
    Exploring Global Hedge Accounting Changes and Their Impacts Dan Gentzel, CPA Karen Weller, CTP Managing Director Director Chatham Financial Royal Caribbean Cruises Agenda 1 IFRS 13 Fair Value Measurement – Impact on Derivative Valuation and Hedge Accounting 2 Hedge Accounting Policy Election – Deciding Between IAS 39 and IFRS 9 3 Novation of OTC Derivatives to Central Clearing Counterparties 4 Accounting for Futures Contracts 5 Overnight Index Swap Rate (“OIS”) – a New Benchmark Rate 6 Key Hedge Accounting Considerations from IFRS 9 7 Accounting for Costs of Hedging Under IFRS 9 8 Proposed ASU: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps 9 The Future of Hedge Accounting Under US GAAP IFRS 13 Fair Value Measurement Impact on Derivative Valuation and Hedge Accounting Overview Practical Implications • IFRS 13 is a new accounting standard . Understanding the impact • Effective Jan 1, 2013 . CVA-DVA – complex to calculate • Converged with US GAAP properly • Defines how to measure fair value . Impact on earnings • Modifies definition in IAS 39 . Additional disclosures • Derivatives are impacted . US GAAP – IFRS differences . • Incorporate credit risk Hedge accounting • Use a market participants approach . Choosing an approach • Calculate CVA-DVA . Materiality . Cost / benefit Hedge Accounting Policy Election Deciding Between IAS 39 and IFRS 9 Overview Practical Implications • Macro hedging project . Choosing either IAS 39 or IFRS 9 • Has delayed release of IFRS 9 hedge . How to evaluate accounting guidance . Reasons for IAS 39 • IASB decided to issue separate IFRS . Reasons for IFRS 9 on macro hedging • IASB provided an accounting policy choice until macro hedging standard issued • Continue applying IAS 39 • Adopt IFRS 9 • Under both choices, IAS 39 macro hedging can continue to be applied until new macro hedging IFRS issued Novation of OTC Derivatives to Central Clearing Counterparties Overview Practical Implications • Regulatory changes expected to .
    [Show full text]
  • Session 7 Derivatives and Hedging
    Session 7 Derivatives and Hedging Risk management background Derivatives Hedging Hedge ineffectiveness FAS 133 and related GAAP (all in ASC Section 815) Analysis of derivatives and hedging 163 Extant Proposals to Change Hedge Accounting In May 2010, the FASB issued Proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities (“the proposed ASU”) Simpler than but reasonably consistent with FAS 133 Somewhat easier to obtain hedge accounting Hedge accounting obscures volatility less After putting the project on the back burner, the FASB began redeliberating the proposed ASU in February 2015 Summary of deliberations through March 23, 2016 is available on FASB website FASB currently plans to issue an exposure draft in 2016Q3 164 Extant Proposals to Change Hedge Accounting (2) In November 2013, the IASB issued new, bank-friendlier hedge accounting rules in IFRS 9 (replacing rules in IAS 39) Provides more flexibility to define the hedged item than either IAS 39 or FAS 133: groups of positions (including derivatives), net positions (including net nil positions), risk layers (including last layers) Also provides more flexibility to define the hedge than IAS 39 or FAS 133: non-derivative/cash instruments classified at fair value through profit and loss Treats certain types of hedge ineffectiveness (e.g., option time value) as a cost of hedging to be amortized into income over time Hedge accounting allowed if economic hedging relationship exists consistent with firm’s risk management strategy; no quantitative threshold need be met The IASB has an ongoing project to allow “macro” hedging of open portfolios; issued discussion paper in April 2014 but does not appear to 165 have made much progress since then Derivatives Under FAS 133 (ASC 815), the payoffs on a derivative depend on the notional amount of one or more underlyings principal amount physical quantity one or more prices interest rates, exchange rates, commodity prices..
    [Show full text]
  • Derivatives and Hedging (Topic 815)
    No. 2017-12 August 2017 Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities An Amendment of the FASB Accounting Standards Codification® The FASB Accounting Standards Codification® is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. For additional copies of this Accounting Standards Update and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT 06856-5116 Please ask for our Product Code No. ASU2017-12. FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly with the exception of May, July, and November by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $255 per year. POSTMASTER: Send address changes to Financial Accounting Series, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. | No. 456 Copyright © 2017 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Foundation. Financial Accounting Foundation claims no copyright in any portion hereof that constitutes a work of the United States Government.
    [Show full text]
  • Accounting for Financial Instruments in the Banking Industry
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gebhardt, Günther; Reichardt, Rolf; Wittenbrink, Carsten Working Paper Accounting for Financial Instruments in the Banking Industry Working Paper Series: Finance & Accounting, No. 95 Provided in Cooperation with: Faculty of Economics and Business Administration, Goethe University Frankfurt Suggested Citation: Gebhardt, Günther; Reichardt, Rolf; Wittenbrink, Carsten (2002) : Accounting for Financial Instruments in the Banking Industry, Working Paper Series: Finance & Accounting, No. 95, Johann Wolfgang Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften, Frankfurt a. M., http://nbn-resolving.de/urn:nbn:de:hebis:30-18018 This Version is available at: http://hdl.handle.net/10419/76902 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen
    [Show full text]
  • Frs139-Guide.Pdf
    The KPMG Guide: FRS 139, Financial Instruments: Recognition and Measurement i Contents Introduction 1 Executive summary 2 1. Scope of FRS 139 1.1 Financial instruments outside the scope of FRS 139 3 1.2 Definitions 3 2. Classifications and their accounting treatments 2.1 Designation on initial recognition and subsequently 5 2.2 Accounting treatments applicable to each class 5 2.3 Financial instruments at “fair value through profit or loss” 5 2.4 “Held to maturity” investments 6 2.5 “Loans and receivables” 7 2.6 “Available for sale” 8 3. Other recognition and measurement issues 3.1 Initial recognition 9 3.2 Fair value 9 3.3 Impairment of financial assets 10 4. Derecognition 4.1 Derecognition of financial assets 11 4.2 Transfer of a financial asset 11 4.3 Evaluation of risks and rewards 12 4.4 Derecognition of financial liabilities 13 5. Embedded derivatives 5.1 When to separate embedded derivatives from host contracts 14 5.2 Foreign currency embedded derivatives 15 5.3 Accounting for separable embedded derivatives 16 5.4 Accounting for more than one embedded derivative 16 6. Hedge accounting 17 7. Transitional provisions 19 8. Action to be taken in the first year of adoption 20 Appendices 1: Accounting treatment required for financial instruments under their required or chosen classification 21 2: Derecognition of a financial asset 24 3: Financial Reporting Standards and accounting pronouncements 25 1 The KPMG Guide: FRS 139, Financial Instruments: Recognition and Measurement Introduction This KPMG Guide introduces the requirements of the new FRS 139, Financial Instruments: Recognition and Measurement.
    [Show full text]
  • Using Hedge Accounting to Better Reflect Risk Mitigation Strategies
    Using Hedge Accounting to Better Reflect Risk Mitigation Strategies Jeff Craft Jason Weaver Deloitte & Touche LLP Agenda Benefits / Requirements / Jason Weaver Challenges of Hedge Accounting Risk Management / What Other Jeff Craft Companies Are Doing? Case Studies Jeff Craft Benefits of Hedge Accounting • To reduce earning volatility • To accurately represent the entity’s risk management activities in the financial statements 3 Copyright © 2014 Deloitte Development LLC. All rights reserved. Requirements of Hedge Accounting • To qualify for hedge accounting, a company must: – Put in place well documented, specific and contemporaneous documentation at inception – Prove effectiveness of the hedging relationship – Prove and monitor the probability of the forecasted event (in the case of a cash flow hedge) • IMPORTANT – No documentation means no hedge accounting – Uncertainty & non-occurrence of forecasted transaction: discontinue hedge accounting 4 Copyright © 2014 Deloitte Development LLC. All rights reserved. Challenges of Hedge Accounting • Hedge criteria are strict – “it’s not a right, it’s a privilege” • Hedging mitigates Economic Risk but can create Accounting/Audit Risk: – Strict FASB Hedge documentation requirements – SEC focus area as this is a very complex topic – Calculating the ineffective /effective hedge balance (Proxy & Cross commodity hedges) – Reporting hedge balances / disclosure requirements – Monitoring compliance with hedge strategy – Additional time & cost burden (People, Process, policy, System) 5 Copyright © 2014 Deloitte Development LLC. All rights reserved. Hedge Types Summary Cash Flow Hedge Hedged Item (Floating Price Hedging Instrument Physical Contract) Mark to Market Asset/Liability and OCI No Accounting Fair Value Hedge Hedged Item (Fixed Price Hedging Instrument Physical Contract) Mark to Market Change in Fair Value Asset/Liability through P&L Asset/Liability through P&L 6 Copyright © 2014 Deloitte Development LLC.
    [Show full text]
  • IFRS 7 IFRS 7 Financial Instruments: Disclosures Is Issued by The
    IFRS 7 IFRS 7 Financial Instruments: Disclosures is issued by the International Accounting Standards Board (the Board). IFRS Standards together with their accompanying documents are issued by the International Accounting Standards Board (the “Board”). Disclaimer: To the extent permitted by applicable law, the Board and the IFRS Foundation (Foundation) expressly disclaim all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs. Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional. Copyright © IFRS Foundation All rights reserved. Reproduction and use rights are strictly limited. Contact the Foundation for further details at [email protected]. Copies of IASB publications may be obtained from the Foundation’s Publications Department. Please address publication and copyright matters to: IFRS Foundation Publications Department 30 Cannon Street, London, EC4M 6XH, United Kingdom. Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749 Email: [email protected] Web: www.ifrs.org The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”, “IFRSs”, “International Accounting Standards” and “International Financial Reporting Standards”, “IFRIC” and “IFRS Taxonomy” are Trade Marks of the IFRS Foundation. © IFRS Foundation 1 Approval by the Board of IFRS 7 issued in August 2005 International Financial Reporting Standard 7 Financial Instruments: Disclosures was approved for issue by the fourteen members of the International Accounting Standards Board.
    [Show full text]
  • The Non-Designation of Derivatives As Hedges for Accounting Purposes Eugene E
    The Non-Designation of Derivatives as Hedges for Accounting Purposes Eugene E. Comiskey and Charles W. Mulford The FASB recently issued Proposed Statement of Financial Accounting Standards, Accounting for Hedging Activities: An Amendment of FASB Statement No. 133. The proposed standard simplifies the accounting for hedging activities and generally increases the appeal of hedge accounting. In this report we survey firms’ reporting practices and examine hedges and hedge accounting generally and seek to determine why firms may decide not to designate derivatives as hedges for accounting purposes. In reviewing the reports of a large sample of firms, we find the following four explicit reasons why companies may decide not to designate derivatives as accounting hedges: (1) the substantial cost of documentation and ongoing monitoring of designated hedges; (2) the availability of natural hedges that can be highly effective; (3) a new accounting standard that broadens the applicability of natural or economic hedges; and (4) qualifying hedges are not available or are too costly or documentation is untimely, inadequate, or unavailable. In addition, a fifth reason, not offered as such by the surveyed firms, is the increased risk of restatement that accompanies hedge accounting. The proposed standard combined with the recently-released SFAS 159, The Fair Value Option for Financial Assets and Liabilities, offer companies a welcome relief to the onerous accounting and reporting requirements of SFAS 133. JARAF / Volume 3 Issue 2 2008 / 3 THE JOURNAL OF APPLIED RESEARCH IN ACCOUNTING AND FINANCE Introduction Recently, the Financial Accounting Standards Board (FASB) provide a brief review of the range of hedge designations that issued Proposed Statement of Financial Accounting Standards, can be applied to derivatives and the basic features of hedge Accounting for Hedging Activities: An Amendment of FASB accounting applicable to these designations; section (2) out- Statement No.
    [Show full text]
  • IFRS 9 Financial Instruments (Hedge Accounting Only)
    EFFECTIVE DATE An entity shall apply this Standard for Snapshot – IFRS 9 – Financial Instruments - Hedge accounting annual periods beginning on or after 1 January 2018. Earlier application is permitted. OBJECTIVE DEFINITIONS Hedging involves designating one or more hedging instruments such that the change in fair value or cash flows of the hedging The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk Derivative is a financial instrument or other contract with all instrument is an offset, in whole or part, to the change in fair management activities that use financial instruments to manage exposures arising from particular risks that three of the following features: value or cash flows of the hedged item. The objective is to could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for • Its value changes in response to changes in a specified ensure that the gain or loss on the hedging instrument is which an entity has elected to present changes in fair value in other comprehensive income). interest rate, security price, commodity price, foreign recognised in profit or loss in the same period that the hedged exchange rate, index of prices or rates, a credit rating or item affects profit or loss. credit index, or other variable, provided in the case of a SCOPE c) the hedging relationship meets all of the following non-financial variable that the variable is not specific to a Hedging instrument for hedge accounting purposes, is a A hedging relationship qualifies for hedge accounting hedge effectiveness requirements: party to the contract.
    [Show full text]