United Kingdom

Hedging 

The IASB has split the hedge accounting phase into two parts: general hedging and macro hedging.  It issued a final general hedging standard in November 2013 as part of IFRS 9 (2013), which was then incorporated into IFRS 9 (2014) which is effective for annual periods beginning on or after 1 January 2018 (subject to endorsement for use in the EU).


 

The new general hedging standard provides a more principles-based approach that aligns hedge accounting more closely with risk management. However, the types of hedging relationships – fair value, cash flow and foreign operation net investment – remain unchanged from IAS 39.

 

 

The IASB is continuing with work to develop a new macro hedging model  to better reflect entities’ dynamic risk management activities while reducing the operational complexities of the current accounting requirements.

 

“Many preparers will support the new general hedge accounting standard. It provides a more principles-based approach that aligns hedge accounting more closely with risk management, which many constituents view as a positive step forward."

Andrew Marshall, Senior Technical Partner

Overview

  • Broadened scope: Fewer restrictions will mean more ‘economic’ hedges will qualify for hedge accounting. Hedge accounting will be more aligned with risk management, placing risk management policy documentation at the centre of the requirements.
  • Hedging instruments: Non-derivative financial assets or liabilities measured at fair value through profit or loss may be designated as hedging instruments in their entirety when hedging relationships of any risk, not only foreign currency risk (as per current IAS 39 rules).
  • Hedged items: Certain risk components of non-financial items may be designated as hedged items. In addition, an aggregate exposure comprising a derivative and a non-derivative may be designated as a hedged item, if managed as a single exposure.
  • Effectiveness testing: Retrospective effectiveness testing would no longer be required. Provided there is an ongoing expectation of more than a reasonable degree of offset then hedge accounting would continue.
  • Discontinuation:  Hedge accounting tracks the risk management objective. Voluntary discontinuation of hedge accounting would be prohibited.

 

Practical issues

Management should:
  • Review and refresh risk management policy documentation and strategies.
  • Consider whether to apply hedge accounting to relationships not permissible under current accounting rules.
  • Consider whether systems and processes can adequately support the enhanced hedging opportunities.
  • Be aware that voluntary de-designation of hedge accounting would no longer be permissible under the proposals.

Contact

 

Nick Chandler

Nick Chandler

Partner

Accounting Advisory Services

KPMG LLP (UK)

  

020 7311 4443  nick.chandler@kpmg.co.uk

 

Colin Martin

Colin Martin

Partner

Banking Accounting Advisory Services

KPMG LLP (UK)

  

020 7311 5184  colin.martin@kpmg.co.uk