Enrique Tejerina, KPMG’s global IFRS financial instruments deputy leader, said: “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.”
Some industries – e.g. banking and insurance – may believe that the new standard will not significantly change the ‘status quo’ from their perspective, as they await the IASB’s macro hedging discussion paper in 2014. However, other industries may be keen to seize the opportunity to further align their hedge accounting with how they actually manage risk.
Tejerina commented: “Airlines, manufacturers and others that have to manage significant commodity price exposures will have the most to gain from the new ability to apply 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 new standard also removes the rigid ‘bright line’ for assessing hedge effectiveness, which will allow for a more flexible principles-based approach to hedge accounting.
However, Tejerina cautioned: “Although the principles in the new standard 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 new hedging model, they may need to apply a greater degree of judgement to comply with it. 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 new standard removes the 1 January 2015 mandatory effective date of IFRS 9. The new mandatory effective date will be determined once the classification and measurement and impairment phases of IFRS 9 are finalised. Entities may make a one-time election to defer application of the new general hedge accounting model until the standard resulting from the IASB’s project on macro hedge accounting is effective. Early application is permitted only if all existing IFRS 9 requirements are applied at the same time or have already been applied.
However, the new standard allows an entity to change the accounting for financial liabilities that it has elected to measure under the fair value option, before applying any of the other requirements in IFRS 9. With that change, gains and losses resulting from an entity’s own credit risk would be recognised outside of profit or loss.
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