Hedge accounting. International Financial Reporting Standards

Transcription

1 International Financial Reporting Standards Hedge accounting The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

2 International Financial Reporting Standards Exposure draft The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

3 Components of the hedge accounting model 3 Objective Alternatives to hedge accounting Hedged items Presentation and Disclosure Hedge accounting (exposure draft) Hedging g instruments Groups and net positions Discontinuation and rebalancing Effectiveness assessment

4 Objective 4 Risk management objective: Seeks to link risk management and financial reporting (top down) Accounting objective: Seeks to manage timing of recognition of gains or losses (bottom up)

5 Hedged items 5 Qualifying hedged item Entire item Component Risk component (separately identifiable and reliably measurable) Nominal component or selected contractual CFs

6 Hedged items: risk components 6 IAS 39 ED Fixed element Fixed element Variable element Variable element Benchmark (eg interest rate or commodity price) Benchmark (eg interest rate or commodity price) Benchmark (eg interest rate or commodity price) Benchmark (eg interest rate or commodity price)

7 Hedging instruments 7 Qualifying hedging instruments Entire item Partial designation FX risk component Intrinsic value Spot element Percentage of nominal amount

8 Time value of options 8 Time value of options Transaction related hedged item Time period related hedged item

9 Hedge effectiveness 9 Hedge effectiveness Hedge effectiveness requirements (qualifying criteria): 1. Objective of effectiveness assessment is met 2. More than accidental offset Measuring and recognising hedge ineffectiveness

10 Discontinuation and rebalancing 10 Objective of hedge effectiveness assessment not met Risk management objective remained the same The risk management objective changed Other than accidental offset Merely accidental offset Discontinue hedge accounting Continue Hedge accounting Discontinue hedge accounting

11 Disclosures: scope 11 Proposed scope for hedge accounting disclosures Total entity risk exposure (no specific disclosure requirements) IFRS 7 Disclosure requirements Hedged exposure (Exposure to risks being hedged) Significance of financial instruments for financial position and performance Nature and extent of risks arising from financial instruments Entity s exposure attributable to the hedged risk

12 Disclosures proposed 12 Hedge accounting disclosures Risk management strategy The amount, timing and uncertainty of future cash flows Effects of hedge accounting on the primary financial statements

13 Alternatives to hedge accounting 13 Alternatives Own use scope exception in IAS 39 Credit derivatives (not proposed) Proposed consequential amendment Fair value accounting (3 alternatives considered)

14 Transition and effective date Proposals: Transition requirements Prospective application of new hedge accounting model to all hedging relationships Hedging relationships that qualified under IAS 39 and qualify under the new model will be treated as continuing hedging relationships No restatement of comparatives Effective date Annual periods beginning on or after 1 January 2013 with earlier application permitted all existing IFRS 9 requirements must be adopted at the same time (or already have been adopted) 14

15 International Financial Reporting Standards Outreach The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

16 Exposure draft Hedge Accounting 16 Exposure draft issued in December 2010 Comment letter deadline was 9 March 2011 During the 3-month consultation period for the exposure draft the Board conducted extensive outreach across all major geographical regions

17 Outreach summary 17 Overview: Feedback from preparers, auditors, regulators, users, standard setters, treasurers, risk management experts and academics More than 2500 individuals participated p Geographical region Number of meetings Africa 10 Ai Asia-pacificifi 44 Europe 47 North America 10 Central America 14 South America 20 Total 145

18 Outreach summary 18 Main positives include: The Board s objective to link hedge accounting with risk management The Board s proposal to remove the % bright line for hedge effectiveness The Board s proposal to allow risk components for non-financial items Main negatives include: Disappointment that the exposure draft does not address macro hedging The exposure draft does not enable entities to fully reflect their risk management strategy for some economic hedges

19 Papers discussed at the April 2011 IASB meeting 19 For more detail please refer to Agenda Paper 7A of the April 2011 IASB meeting (Refer to Agenda paper 7B for a summary of the comment letters received)

20 International Financial Reporting Standards Tentative decisions Redeliberations taking into consideration the feedback received form the comment letters and the outreach activities The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

21 Feedback on Hedge Accounting ED 21 Strong support for the ED including improved link with risk management proposal to remove the % bright line proposal to allow risk components for non-financial items Some concerns: restriction on hedging g for items affecting OCI (particularly equity investments) Necessity for clarification of concepts Absence of topic of macro hedge accounting

22 Changed in redeliberations 22 Topic Equity investments measured at fair value through OCI Decision Agreed to allow hedge accounting. Fair value hedge accounting Retain mechanics of IAS 39. mechanics Require single note about cash flow and fair value hedges. Disclosure of fair value hedge adjustment. Hedging of layers with Can hedge: prepayment options a layer component within the hedged d item for the amounts that are not pre-payable. pre-payable layer if prepayment effect included d in measurement of hedged d item.

23 Changed in redeliberations 23 Topic Decision Net position cash flow hedges Cash flow hedges of net positions are only be available for hedges of foreign currency risk. Remove the restriction that the offsetting cash flows in a net position must all affect the income statement in the same reporting period. Instead, the eligibility criteria are extended to require that the items within the net position must be specified in such a way that the pattern of how they will affect the income statement is set out as part of the initial hedge designation.

24 Changed in redeliberations 24 Topic Decision Own-use scope exception Extend to contracts that meet the own use scope exception the FVO in IFRS 9 if it eliminates or significantly reduces an accounting mismatch.

25 Changed in redeliberations 25 Topic Decision Accounting for forward points Permit forward points that exist at inception of the hedging relationship to be recognised in profit or loss over time on a rational basis. Recognise the difference between cumulative amortisation and subsequent fair value change in accumulated other comprehensive income. This is to provide a better representation of the economic substance of eg a funding swap transaction and the performance of the net interest margin.

26 Changed in redeliberations 26 Topic Decision Disclosures Changed the disclosure requirements related to the amount, timing and uncertainty of future cash flows in the exposure draft. The Board tentatively decided to rather focus on the terms and conditions of the hedging instrument. Entities that use a dynamic hedging strategy that involves frequent resetting of hedging relationships are exempt from disclosing terms and conditions of the hedging instruments. Instead, they will: expand the risk management strategy description and explain how hedge accounting is used to reflect the dynamic hedging strategy; and if applicable, disclose that the volumes at year end do not reflect normal volumes.

27 Changed in redeliberations 27 Topic Decision Hedges of credit risk using Allow elective fair value through profit credit derivatives or loss (FVTPL) accounting for a credit exposure (eg loans, bonds and loan commitments) when hedged with a credit derivative: FVTPL can be elected at initial recognition of the credit exposure or subsequently (incl. for a component of nominal amounts). Difference between carrying amount and fair value is immediately recognised in profit or loss. When FVTPL is discontinued amortisation similar to fair value hedge (incl. for loan commitments).

28 Changed in redeliberations 28 Topic Hedges of credit risk using credit derivatives (cont.) Decision Disclosure requirements added: A reconciliation of the nominal amount and the fair value of the credit derivatives that t have been used to manage the credit exposure. Gain or loss recognised in profit or loss as a result of electing fair value through profit or loss. For discontinuations of elective fair value through profit or loss accounting for credit derivatives, the fair value that becomes the new deemed cost or amortisable amount.

29 Confirmed in redeliberations 29 Topic Cash instruments measured at FVTPL as eligible hedging instruments Hedging sub-libor cash flows Decision Did not extend to other cash instruments (ie those not at FVTPL). Clarified that liabilities measured at fair value under the FVO with the own credit effect in OCI are NOT eligible hedging instruments. Cannot hedge a ( full ) LIBOR component of a sub-libor cash flow. Will clarify that t total t cash flows can be hedged for changes in LIBOR. Also applies to non-financial items.

30 Confirmed in redeliberations 30 Topic Effectiveness testing: clarification of the term other than accidental offsetting Decision Clarify intention and rather refer to: The notion of an economic relationship between the hedged item and the hedging instrument, t which gives rise to offset. The effect of credit risk on the level of offsetting gains or losses on the hedging instrument and the hedged item that may reduce or modify the extent of offsetting.

31 Confirmed in redeliberations 31 Topic Decision Effectiveness testing: Clarify intention that the hedge ratio of clarification of unbiased and the hedging relationship shall be based minimise expected hedge on the entity s economic hedge ie: ineffectiveness The quantity of hedged item that it actually hedges. The quantity of the hedging instrument that it actually uses to hedge that quantity of hedged item. But designation must not reflect an imbalance that would create hedge ineffectiveness in order to achieve an accounting outcome that is inconsistent with the purpose of hedge accounting.

32 Confirmed in redeliberations 32 Topic Accounting for time value of options Decision Confirm the accounting outcomes for the accounting for time value of options as proposed in the ED (ie based on the nature of the hedged item). Expand the application guidance in the ED to assist distinguishing accounting for transaction related and time period related hedged items. Not introduce an accounting choice to account for time value of options either as: (i) proposed in the ED or (ii) in accordance with IAS 39.

33 Confirmed in redeliberations 33 Topic Designation of combinations of options as hedging instruments Decision To amend the requirements such that a combination of a written and a purchased option (regardless of whether the hedging instrument arises from one or several different contracts) can be jointly designated as the hedging instrument t provided d that t the combination is not a net written option.

34 Confirmed in redeliberations 34 Topic Decision Rebalancing Align the notion of rebalancing with the Board s tentative decision on the hedge effectiveness assessment, hence: The hedging relationship is rebalanced for hedge accounting purposes when the hedge ratio is adjusted for risk management purposes. But designation must not reflect an imbalance that would create hedge ineffectiveness in order to achieve an accounting outcome that is inconsistent with the purpose of hedge accounting.

35 Confirmed in redeliberations 35 Topic Decision Rebalancing (cont.) The notion of proactive rebalancing is eliminated. Clarify that rebalancing covers only adjustments to the quantities of the hedged item or the hedging instrument for the purpose of maintaining a hedge ratio that t complies with the requirements of the hedge effectiveness assessment.

36 Confirmed in redeliberations 36 Topic (No) Voluntary Discontinuation Decision Add guidance about how the risk management objective and the risk management strategy relate to each other using examples contrasting these two notions. Confirm the proposals in the ED and hence prohibit voluntary discontinuation of hedge accounting when the risk management objective remains the same and all the other qualifying criteria are still met.

37 Confirmed in redeliberations 37 Topic Decision Aggregated exposures Confirm proposal in the ED, that is, allow designation of an aggregated exposure as the hedged item in a hedging relationship. Add illustrative examples to accompany the final standard. Explicitly itl clarify in the final standard d that the proposal does not allow 'synthetic accounting'.

38 Confirmed in redeliberations 38 Topic Decision Aggregated exposures Do not impose achieving hedge accounting for the relationship between the exposure and the derivative that constitute the aggregated exposure as a precondition for the aggregated exposure being eligible as the hedged item. Provide additional clarification by: explaining how aggregated exposures relate to forecast transactions; and adding application guidance on how to apply the general requirement in the context of aggregated exposures.

39 Confirmed in redeliberations 39 Topic Net presentation in a separate line item in the income statement Decision Confirm the proposals in the ED regarding presentation in the income statement and that the separate line item for hedging gains and losses also includes the gains or losses on forecast transactions deferred to later periods.

40 Confirmed in redeliberations 40 Topic Decision Linked Presentation Confirm the proposal in the ED that linked presentation not be allowed for fair value hedges.

41 Confirmed in redeliberations 41 Topic Decision Hedging of risk components Retain the notion of risk components as eligible hedged items. Determine eligible risk components on the basis of the criteria proposed in the ED, ie that a risk component must be separately identifiable and reliably measureable. Use a single set of criteria for all items, ie that the criteria should apply for all types of items risk components of financial and non-financial items. Provide guidance on how to apply the criteria. Eliminate the general prohibition regarding designating inflation risk components (but add a caution and rebuttable presumption).

42 Confirmed in redeliberations 42 Topic Decision Disclosures Confirm the scope of the disclosures in the ED. Confirm the disclosure requirements related to an entity s risk management strategy in the ED. Confirm the disclosure requirements related to the effects of hedge accounting on the primary financial statements in the exposure draft.

43 Confirmed in redeliberations 43 Topic Decision Transition requirements Prospective with limited exceptions. Exceptions (for hedging relationships that exist at the beginning of the comparative period [or later]): Required retrospective application for accounting for time value of options. Permitted retrospective application for accounting for forward elements (if elected, applies to all such hedging relationships).

44 Confirmed in redeliberations 44 Topic Decision Transition requirements Practical expedients Entities allowed to consider the moment IAS 39 ceases to apply and the moment from which the new model applies as one point in time. For the purpose of rebalancing, the starting point will be the hedge ratio used under IAS 39 (any gains or losses will be recognised in profit or loss).

45 General hedge accounting: timetable 45 Exposure Draft on general hedge accounting published December 2010 Redeliberations started in March 2011 completed in September 2011 Staff draft of final general hedge accounting requirements available on website in Q (for about 3 months) Effective date will be aligned with other phases of IFRS 9 Annual periods beginning i on or after 1 January 2013/2015* with earlier application permitted All existing IFRS 9 requirements must be adopted at the same time (or already have been adopted) d) 2011 October IFRS 9 Implementation Conference

46 International Financial Reporting Standards Hedge Accounting: Macro Model 2011 October IFRS 9 Implementation Conference

47 Macro hedge accounting 47 In April the Board discussed portfolio risk management activities In June a group of banks presented information about their risk management practices at a (public) education session. In September the Board discussed differences between the existing accounting and risk management and what broad approaches might be used to provide more useful information.

48 Status of the Macro Hedge Accounting Project 48 Fact finding Project status Common themes Common themes Implications for accounting model Design of accounting model Implications for accounting model Design of accounting model Sept 2011 Interest rate risk Other risks

49 Insights from the project so far 49 Consumer Loans Mortgage Loans Commercial Loans Margin: contractual market rate vs. internal transfer price Impairment Risk/Prepayment Risk/Market Rate Risk Volatility in profit or loss due to: Uncertainty regarding impairment and prepayment (model risk) Margin for new business dependent on market forces Transfer (Benchmark) Prices - Component Asset Liability Management (ALM) Margin (Bid-Offer Spread of Transfer Prices) Repricing Risk / Yield Curve Risk / Basis Risk Use of Risk Limits for Management Volatility in net profit and loss due to: Differences in timing i of cash flows Basis differences Amount differences (vintage) Open positions Internal Transactions (Derivatives) Influence on risk limit and target cash flow profile Demand Deposits Time Deposits Other Liabilities Margin: internal transfer price vs. contractual market rate Prepayment Risk / Market Risk Volatility in profit or loss due to: Uncertainty regarding prepayment (model risk) Margin for new transactions dependent on market forces Treasury Trading Unit Equity Capital Protection Dividend targets Management within predefined risk limits. Trading Unit takes and manages the counterparty risk of the entire derivative position.

50 EU IAS 39 carve out 50 Remainder... Hedged items Hedge effectiveness

51 Applicability to other industries 51

52 Questions or comments? 52 Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.