A solution devised by the International Accounting Standards Board (IASB) in response to criticisms of the language of its proposed
IFRS 9 amendment on hedge accounting
is a win for corporates but remains a flawed piece of work, according to Reval.
The main drawback, said the treasury and risk management group, is that the IASB’s further amendment, if adopted, would further complicate accounting for foreign exchange (FX) hedges.
Reval noted that the IASB’s alternative solution applies a fix to the way the IFRS 9 amendment, issued last September, treated the element of currency basis in forward FX pricing, which would have left companies exposed to significant profit and loss volatility and would have created misalignment between their risk management strategies and accounting.
“The downside is that the solution itself will create a layer of complexity when accounting for FX hedges,” said Blaik Wilson, chairman of Reval’s hedge accounting technical taskforce. “In short, the IASB achieved the accounting outcome at the expense of simplicity. Clearly what the IASB discovered in replacing the current hedge accounting rules was that aligning the accounting to risk management outcomes was paramount.”
The group goes on to suggest that in practical terms, the IASB’s decision this week means that most companies will elect to designate only the spot risk of their currency hedging. This will minimise profit and loss (P&L) volatility in most cases but it increases complexity as both the hedged and excluded components must be monitored separately.
“The cornerstone of this week’s decision was the IASB’s acceptance that currency basis reflects a ‘cost of hedging’ in forward FX pricing, much like premiums that are paid for options,” added Wilson. “This decision means that the way companies designate and process currency hedges will likely be very different between IFRS 9 and IAS 39. Organisations need to start thinking now about how they will adapt to that change.”
The final standard is expected to be published before July 2013, with early adoption available immediately from that point.
Further commentary on the flaws within IFRS 9 can be accessed
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