IASB relaxes stance on 'macro-hedging'

In its latest exposure draft on IAS 39, which seeks to effectively account for derivatives by including gains and losses in their value on the balance sheet, the IASB has proposed that macro-hedging be applied under certain circumstances. Macro-hedging can be defined as using a single derivative to hedge a number of positions rather than hedging one-to-one.

The proposal requires that the company split the macro portfolio into time periods based on expected re-pricing dates and designate assets or liabilities against them as hedged items. 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.

The IASB said the need for accounting guidance was driven by the increasingly prevalent use of financial instruments for both risk management and other operating purposes. The release of the exposure draft is part of a continuing process to ease the implementation of IAS 39, said the IASB.

“A standard on financial instruments is an essential element of any complete set of accounting standards,” commented David Tweedie, IASB chairman. “Implementing IAS 39 certainly poses challenges, but this reflects the fact that derivatives today are complex instruments, and IAS 39 bridges the world of traditional cost accounting and a model that relies more on market values.”

The IASB held a number of roundtable discussions in March with representatives of financial institutions to find a way to accommodate hedge accounting. “While the discussions did not produce complete agreement on the measurement of hedge ineffectiveness and deposit liabilities, the IASB’s approach set out in the exposure draft would mark an important advance by permitting macro hedging,” said the IASB.

All comments on the exposure draft must be with the IASB by November 14.