Click to edit Master title style

Transcription

1 KPMG s CFO Financial Forum and IFRS Institute Click to edit Master title style Webcast IASB Issues Hedge Accounting Model September 19, 2012 Enrique Tejerina, partner, KPMG LLP Mike Gaiso, senior manager, KPMG LLP Department of Professional Practice Click to edit Master subtitle style Click to edit Master text styles Administrative CPE regulations require online participants to take part in online questions. Participants are required to respond to a minimum of four questions in order to be eligible for CPE credit. Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization. Send questions via the Ask a Question button. Help Desk: or outside the United States at

2 Overview of IASB hedge accounting review draft Current hedge accounting model considered complex, not reflective of risk management, and excessively rules based, resulting in arbitrary outcomes Review draft attempts to: Align hedge accounting more closely with risk management Take a more principle-based approach to hedge accounting Address inconsistencies and weaknesses in the existing model 2 Overview of significant changes Aligns hedge accounting more closely with risk management Fair value option (FVO) for certain own-use contracts FVO for certain credit exposures managed for credit risk using credit derivatives as a substitute for hedge accounting Cash instruments may be hedging instruments in additional circumstances Additional exposures may be hedged items: Risk components of non-financial items and non-contractually specified inflation Net positions and layer components of items Aggregated exposure Equity investments at fair value through OCI (Other Comprehensive Income) 3 2

3 Overview of significant changes (continued) Effectiveness assessment: Qualitative test replaces arbitrary bright lines Forward looking only Hedging relationships may require rebalancing without terminating hedge accounting Voluntary termination of hedging relationships prohibited Time value of purchased options and forward element of forward contracts may be deferred or amortized Additional disclosure requirements regarding an entity s risk management and hedging activities 4 Objective and scope Objective of hedge accounting To represent in the financial statements the effect of risk management activities when financial instruments are used to manage risk exposures arising from particular risks that could affect Profit or Loss (or Other Comprehensive Income [OCI] in limited circumstances) Scope excludes macro hedging 5 3

4 Own use contracts Can the contract be settled net in cash or another financial instrument, or by exchanging financial instruments? Was the contract entered into and does it continue to be held for the entity's expected purchase, sale or use? Would FVTPL accounting eliminate or significantly reduce an accounting mismatch that would otherwise occur? Has the entity elected FVO? FVTPL Executory contract Derivative 6 FVO for certain credit exposures managed for credit risk using credit derivatives FVO as a substitute for hedge accounting Matching name and seniority Elected at initial recognition or subsequently All or part of credit exposure Revocable Recognized (e.g., a loan) or unrecognized (e.g., a loan commitment) Difference reported in profit or loss 7 4

5 Polling question # 1 With respect to the financial instruments project, the Boards will: A. Issue fully converged standards by June 2013 B. Issue fully converged standards but not until later than 2013 C. t achieve their goal of issuing converged standards in the foreseeable future 8 Cash hedging instruments Qualifying non-derivative hedging instruments: FVTPL financial instruments except for: FVO liability with fair value changes due to credit risk in OCI Financial asset or liability designated as FVO to reduce/eliminate an accounting mismatch if designation as a hedging instrument would recreate the mismatch For hedges other than foreign currency, the entire or proportion of a financial instrument must be designated Prohibition on designating internal instruments retained 9 5

6 Additional exposures may be hedged items Specifically identifiable and reliably measurable risk components Risk components of non-financial items Groups of items (including net positions) Aggregated exposures FVTOCI investments Prohibition on designating internal instruments retained 10 Hedged items Risk components of non-financial items Same criteria for financial and non-financial i risk components Separately identifiable Reliably measurable Assessing risk components for eligibility performed in the context of the particular market structure to which the risk relates and in which the hedging activity takes place Contractual vs. non-contractual 11 6

7 Evaluating whether a risk is separately identifiable Is there a contract? Does the contract specify how the risk is priced into the contract? Is the risk separately considered in pricing the hedged item based on externally available information? Risk is separately identifiable (permitted hedged risk if also reliably measurable ) Risk not separately identifiable (not permitted hedged risk) 12 Evaluating whether a risk is reliably measurable Are the inputs to measuring the effect of the risk observable based on externally available information? Are the unobservable inputs insignificant to the measurement? Risk not reliably measurable (not permitted hedged risk) Risk is reliably measurable (permitted hedged risk) 13 7

8 Polling question # 2 I understand the current IFRS hedge accounting rules: A. Well or very well B. In general, but not in detail C. Very little or not at all 14 Hedged items Groups Eligibility criteria of a group of items (including net positions) as the hedged item Consists of (components of) items that would individually be eligible hedged items Items in the group are managed on a group basis for risk management purposes For a cash flow hedge of a group of items whose variability in cash flows are not expected to be approximately proportional to the overall variability in cash flows so that an offsetting risk position arises: Hedged risk must be FX risk, and Designation must specify when the forecast transactions are expected to affect P&L as well as their nature and volume For a net position to be eligible for hedge accounting, all of the individual items comprising i the net position must be designated. d For example, if an entity has a group of firm sale commitments in 9 months time for 100 FC and a group of firm purchase commitments in 18 months time for 120 FC, it could not achieve hedge accounting by designating a net position amount of 20 FC. Instead, it would have to designate a gross amount of purchases and a gross amount of sales that together comprise the net position. 15 8

9 Hedged items Groups (continued) Requirements for designating a component of a nominal amount in a group Designating a percentage or layer component of an eligible group of items must be consistent with the entity s risk management objective For a layer component of a group of items: Layer must be separately identifiable and reliably measurable All items in the group would have to be exposed to the same hedged risk Entity can identify and track the group of items Change in fair value of the hedged layer in a fair value hedge must consider the effect of any prepayment options of the individual items that comprise the group 16 Polling question # 3 I believe that the current hedge accounting requirements under both U.S. GAAP and IFRS: A. Are unnecessarily complex under both U.S. GAAP and IFRS B. Reflect the complexity of the subject and are therefore necessary to ensure comparability of reporting 17 9

10 Hedged items Aggregated exposures Aggregated exposure = non-derivative exposure + derivative Effectiveness assessment and ineffectiveness measurement nderivative exposure Derivative vs. Derivative hedging instrument Effectiveness Assessment Ineffectiveness Measurement If aggregate exposure is a hedging relationship, assessment and measurement would be performed at that level 18 Hedged items Aggregated exposures (continued) Example of an aggregated exposure: 10-year fixed rate debt in a foreign currency + 10-year fixed to variable CCIRS Hedged item Aggregated exposure 10-year variable rate debt in domestic currency Hedging instrument 5-year domestic variable to fixed IRS An aggregated exposure may or may not be a hedging relationship depending on risk management 19 10

11 Accounting for qualifying hedges FVTOCI investments FVTOCI hedged item changes in fair value in OCI Hedging instrument changes in fair value in OCI Ineffectiveness in OCI Amounts never reclassified from AOCI to profit or loss 20 Hedge effectiveness assessment 1) Economic relationship between the hedged item and hedging instrument must exist 2) Credit risk does not dominate the value changes that result from the economic relationship 3) Hedge ratio used for hedge accounting must equal that actually used for risk management Hedge ratio must not be intentionally weighted to create hedge ineffectiveness to achieve an accounting outcome inconsistent with the purpose of hedge accounting Although not explicit in Review Draft, link between hedging relationships and risk management objectives will need to be established

12 Hedge effectiveness assessment (continued) Qualitative or quantitative? At the inception of the hedge relationship and On an ongoing basis at least upon: Each reporting date, or A significant change in the circumstances affecting the hedge effectiveness requirements Must capture the relevant characteristics of the hedge relationship including sources of hedge ineffectiveness Depends on facts and circumstances Qualitative or quantitative? Derivative in or out of the money is not determinative Qualitative assessment may be appropriate if critical terms of hedging instrument and hedged item match or closely align An entity s risk management is the main source of information to perform the effectiveness assessment May need to change methods if relevant characteristics or sources of ineffectiveness change 22 Polling question # 4 I believe that the IASB hedge accounting exposure draft will: A. Affect the FASB s deliberation process for its hedge accounting exposure draft and ultimately affect U.S. GAAP B. Be ignored by the FASB C. Be withdrawn by the IASB 23 12

13 Rebalancing and discontinuation of hedge accounting Rebalancing Adjustments to the quantities of the hedged item and/or hedging instrument to maintain a hedge ratio that complies with the hedge effectiveness requirements Rebalancing allows hedge accounting to continue in situations in which the change in the relationship of the hedging instrument and hedged item can be compensated for by adjusting the hedge ratio Ineffectiveness is recognized in P&L Risk management strategy vs. risk management objective Rebalancing hedging relationships can be complex Hedge documentation including expected sources of ineffectiveness is updated upon rebalancing Voluntary discontinuation prohibited 24 Rebalancing and discontinuation of hedge accounting (continued) Risk management objective still the same? Discontinue hedge accounting Have the hedging instrument/hedged item amounts actually used changed? Continue hedge accounting Rebalance Outcome must not be inconsistent i twith the purpose of hedge accounting 25 13

14 Accounting for time value of purchased options Option intrinsic value as hedging instrument Fair value hedges and cash flow hedges Change in fair value of the time value of a purchased option would be recognized in OCI to the extent that it relates to the hedged item Reclassification to P&L depends on whether the hedged item is: Transaction-related: nature of hedged item is that of transaction costs For example, hedged purchases and sales Time period-related: nature of hedged item is that of the cost for obtaining protection against a risk over a particular time period For example, hedged inventory for six months Applies to zero cost dollars Less P&L volatility but more OCI volatility 26 Accounting for the forward element of a forward contract Spot element as hedging instrument Fair value hedges and cash flow hedges Change in fair value of the forward element of a forward contract would be recognized in OCI to the extent that it relates to the hedged item Less P&L volatility but more OCI volatility Original forward element amortized to P&L on a rational basis over the period to which the forward element relates 27 14

15 Effective date and transition Effective date Annual periods beginning on or after January 1, 2015 consistent with the Amendments to IFRS 9 Early adoption permitted if all existing IFRS 9 requirements simultaneously or previously adopted Transition Generally prospective Retrospective application: Required for the time value of purchased options for all hedging relationships where an option s intrinsic i i value was the hedging instrument under IAS 39 Permitted for hedging relationships where the spot element of a forward contract was the hedging instrument under IAS 39 Election must be applied consistently 28 Polling question # 5 Overall, do you believe the SEC will decide in 2013 to incorporate IFRS in the financial reporting system for U.S. issuers? A. B

16 Comparison of IASB review draft and FASB ED IASB Review Draft Comprehensive change n-derivative financial instruments eligible ibl as hedging instrument t in a hedge of FX risk under any hedging model n-derivative financial instruments measured at FV-NI eligible as hedging instrument Hedging risk components of a non-financial item Eligible if the risk is specifically identifiable and reliably measurable FASB ED Focuses on select key changes n-derivative financial instruments eligible ibl as hedging instrument t in a hedge of FX risk in a fair value hedge of a firm commitment or a net investment in a foreign operation n-derivative financial instruments measured at FV-NI prohibited as hedging instrument Hedging risk components of a non-financial item Prohibited except for FX risk substantive change from existing practice 30 Comparison of IASB review draft and FASB ED (continued) IASB Review Draft Revocable FVO for certain credit exposures managed for credit risk using credit derivatives Hedging gross positions no additional qualifying criteria Hedging net positions, including nil eligible if criteria are met Hedging aggregated exposures eligible Hedging layer in a fair value hedge Eligible Effectiveness assessment Hedge must pass a qualitative test; ongoing testing required substantive change from existing practice FASB ED change in hedging credit risk or the use of the general FVO Hedging gross positions similarity test Hedging net positions, including nil prohibited Hedging aggregated exposures Prohibited Hedging a layer in a fair value hedge Prohibited Effectiveness assessment Hedge must be reasonably effective; ongoing testing only required under certain circumstances 31 16

17 Comparison of IASB review draft and FASB ED (continued) IASB Review Draft assumption of perfective effectiveness Cash flow hedge retains the lower of test Changes accounting for the time value of purchased option and forward element of forward contracts Rebalancing required in certain cases and allows hedge accounting to continue Voluntary discontinuation prohibited FASB ED assumption of perfective effectiveness Cash flow hedge no lower of testt change in the accounting for the time value of purchased options or forward element of forward contracts Rebalancing never required and would require hedge accounting to terminate Voluntary discontinuation generally prohibited (effective termination OK) substantive change from existing practice 32 Questions and answers 17

18 Presenter s contact details Enrique Tejerina Phone: etejerina@kpmg.com Mike Gaiso Phone: mgaiso@kpmg.com The information contained dherein is of a general nature and is not intended dto address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The information contained herein is of a general nature and is not intended to address the specific circumstances of any individual or entity. KPMG and the KPMG logo are registered trademarks of KPMG International