New Hedge Accounting Standard Removes the Rigid ‘Bright Line’

The International Accounting Standards Board's (IASB) new general hedge accounting standard, the IFRS 9 Financial Instruments (2013), issued on Tuesday removes the rigid ‘bright line’, or rigid mathematical rules for assessing hedge effectiveness, which will further facilitate a more flexible principles-based approach to hedge accounting, says KPMG.


"Currently, the hedge accounting standard is rules-based and does not allow companies to reflect their risk management activities," says Ong Pang Thye, Head of Audit, KPMG in Singapore. “The new standard provides a more principles-based approach that aligns hedge accounting more closely with risk management, something that many view as a positive step forward.”


Some industries such as the banking and insurance sectors may believe that the new standard will not significantly change the status quo from their perspective, as they await IASB’s macro hedging discussion paper in 2014. However, other industries may be keen to seize the opportunity to align their application of hedge accounting with how they manage financial and price risk.


“Airlines, shipping and other industries 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,” says Ong. “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.”


Removal of mandatory effective date
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.


However, this removal does not affect companies in Singapore as the Accounting Standards Council (ASC) here has deferred the adoption of IFRS 9 in Singapore. Hence, the standard is not available for companies reporting under Singapore Financial Reporting Standards.


The ASC is likely to wait for the IASB’s completion of the entire IFRS 9 project before adopting the standard in Singapore. The most significant piece outstanding is the approach for credit impairment where the target completion date by the IASB is the first half of 2014.


Ong is hopeful that companies may be able to apply the entire standard in 2014 if the credit impairment piece is completed on time.


Nonetheless, more must be done to guide organisations in preparing to implement this new standard, he added.


He said: “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.”


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