IAS39 amended to allow for macro hedging

Controversial International Accounting Standards Board (IASB) proposals for the marking-to-market of derivatives, known as IAS39, are to be amended to allow for ‘macro hedging’.

Macro-hedging is the use of a single derivative to hedge a number of positions rather than hedging one-to-one. Earlier versions of IAS39 did not allow for the practice. IAS39 now allows for hedged items to be designated as an amount of a currency rather than as an individual asset or liability. The standard now also allows the gain or loss attributed to a hedged item to be presented as a separate line item in the balance sheet.

Last August the IASB proposed that macro-hedging be allowed as long as the company split the macro portfolio into time periods based on expected re-pricing dates, and that they designate assets or liabilities against them as hedged items. They proposed that all the assets from which the hedged amount is drawn must be items whose fair value changes in response to the risk being hedged and that could have qualified for fair-value hedging under IAS 39 if hedged individually.

“This amendment is a further step in our project to ease the implementation of IAS 39 for the thousands of companies required to implement international standards in 2005,” said David Tweedie, IASB chairman. “The IASB has made it clear that any amendments must be within the basic principles of hedge accounting contained in IAS 39, but that we will work within those principles to simplify the application of the standard. This amendment does not mark the end of the board’s work on the subject of financial instruments.”

The IASB added that it also intends to set up an international working party to examine the fundamentals of IAS39 with a view to ultimately replacing it, “in due course”.

“The financial instruments working party will assist in improving, simplifying and ultimately replacing IAS 39, and examine broader questions regarding the application and extent of fair-value accounting – a topic on which the IASB has not reached any conclusion,” said the IASB.Any replacement could take several years, it said.