- Companies with significant commodity price exposure most likely to welcome them
KPMG welcomes the International Accounting Standards Board’s draft of its forthcoming IFRS on general hedge accounting that was issued today.
Andrew Vials, technical accounting partner at KPMG in the UK, said: “Many preparers will support these revised proposals. It appears that in redeliberating the December 2010 Exposure Draft, the IASB has responded to stakeholder requests for conceptual clarifications and more ‘meat on the bone’ for the new concepts. It has done this without losing the more principles-based approach that aligns hedge accounting more closely with risk management that many constituents viewed as a positive step forward.”
Some industries (e.g. banking and insurance) may believe that these proposals will not significantly change the ‘status quo’ from their perspective, as they keenly await the IASB’s macro hedging discussion paper later this year. However, other industries may be keen to seize the opportunity to further align their hedge accounting with how they actually manage risk.
Andrew Vials commented: “Airlines, manufacturers and others that have to manage significant commodity price exposures will have the most to gain from the proposals to permit hedge accounting for risk components of non-financial items. A company will be able to reflect in its financial statements an outcome that is more consistent with how management assesses and mitigates risks for key inputs into its core business.”
The proposals also remove the rigid ‘bright line’ for assessing hedge effectiveness, which will allow for a more flexible principles-based approach to hedge accounting.
However, Andrew Vials cautioned: “Although the principles in the draft will provide welcome relief, the application guidance in some areas remains complex. Significant effort may be needed to analyse the requirements and determine how best to apply them to a company’s particular circumstances. While some entities may be eager to implement the proposals, they may need to apply a greater degree of judgement to comply with them. In addition, to complement a more principles-based approach, additional disclosures will be required to inform users of how an entity is managing its risks.”
The draft will be available until early December 2012, after which time the IASB intends to proceed to finalise the draft.
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