IAS 39 LATEST – TWO CHANGES AND A REVOLUTION? Hedge

INSTRUMENTS FINANCIERS
This article looks at the likely evolution of financial instruments accounting under
IFRS, including an overview of pending changes to IAS 39 in respect of Net Investment Hedging and Portions of Risk. It then goes on to look at indications of what
longer term developments might look like, based on the IASB’s recent work with its
Financial Instruments Working Group and with the FASB and on the draft standard
on accounting by Small and Medium-sized Entities (SME).
S EBAST I A N D I PAO L A
IAS 39 LATEST – TWO CHANGES
AND A REVOLUTION?
Hedge accouting, latest developments
1. INTRODUCTION
Following several years of constant development, regular
changes, revisions and interpretations, 2006 was a quiet year
for accounting for financial instruments under International
Financial Reporting Standards (IFRS). The International Accounting
Standards Board (IASB) did not issue any amendments to IAS 39,
and there was just one exposure draft on IAS 32. However,
2007 has already seen significantly more activity from the
Board.
This activity from the Board is partly a result of discussions
which started in 2006 at the International Financial Reporting
Interpretations Committee (IFRIC) level – IFRIC is the IASB’s
interpretations sub-committee – and partly of the longer
term alternatives that begin to take shape. In this article we
will look at two specific topics which are currently out for
comment and will then look at what the IASB has produced
relating to longer term developments. Broadly we will cover
these topics under the following headings:
a) Current changes:
é Hedges of Net Investments in Foreign Operations: a look
at draft IFRIC interpretation D22. é Hedging portions of
financial risks: a review of the IASB’s exposure draft of
changes to IAS 39 relating to exposures qualifying for hedge
accounting.
b) Developments to watch for the longer term:
é Convergence: a look at the Memorandum of Understanding
(MoU) signed by the IASB and the Financial Accounting Standards Board (FASB) as a basis for future convergence. é Hedge
SEBASTIAN DI PAOLA,
PARTNER, PRICEWATERHOUSECOOPERS SA,
GENEVA,
SEBASTIAN.DI.PAOLA@
CH.PWC.COM
862
accounting for SME: an indication of the IASB’s thinking on
potential simplifications to hedge accounting based on the
proposed Exposure Draft on IFRS for SME. é Simplifying
hedge accounting: suggestions to the IASB based on the work
of a small group of corporate treasurers forming part of the
IASB’s Financial Instruments Working Group.
Both the items under current changes result from discussions
following various queries raised with IFRIC in 2006 on net
investment hedging and qualifying portions of risk for hedge
accounting. Looking at these in turn:
2. CURRENT CHANGES
2.1 Net Investment Hedging. The discussion on Net Investment Hedging has centred on the question of what currency
exposures within a group are eligible for this form of hedge
accounting, and at what level in a group’s structure these
hedges can be located. The content of this discussion is best
illustrated with an example ( figure).
The Parent and reporting entity preparing IFRS financial
statements has a EUR functional currency and a USD presentation currency. Obviously this situation is unusual, but is
occasionally found in practice and is catered for by IAS 21. The
Parent has two subsidiaries: Subsidiary A with a Yen functional currency and Subsidiary B with a GBP functional currency. Subsidiary B owns 100% of Subsidiary C with a functional currency of CHF.
There are three questions that the IFRIC has been discussing in this context:
1. Whether IAS 21 presumes any particular consolidation
mechanism (i. e. direct consolidation into the parent or via
sub-consolidations) and whether there is any impact of this
on the accounting for a hedge of a net investment. IFRIC
concluded that IAS 21 did not prescribe any particular
method of consolidation and that anyway this should have
no impact on the availability of net investment hedge accounting. In our example, the group can therefore hedge account for Sub B’s hedge of Sub C into GBP in the group consolidated accounts.
2. Whether the hedged risk is determined by reference to the
functional currency of the ultimate parent, an intervening
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holding company, or the group’s presentation currency (i. e.
that which is used when publishing accounts). IFRIC members felt that the hedge could be against the functional currency of the ultimate parent or of any intermediate holding
company, but not against the presentation currency, since it
was felt that this did not reflect a true economic exposure. In
our example this would mean that either the Parent or Sub B
can hedge the net investment in C against either of their own
functional currencies, but not against USD.
3. Finally IFRIC considered whether there were any restrictions on where the hedging instrument could be held within
a group. In our example: Can Sub A hold the hedging instrument for the net investment hedge of Sub C, or is this restricted to Sub B or the Parent? After much debate and considerations of whether there is a distinction here between
“one-legged” instruments (eg a borrowing) or “two legged”
instruments (eg an FX forward contract), it was ultimately
concluded that the hedging instrument can be held anywhere
in the group, irrespective of the functional currency of the
entity holding it. This will surprise many commentators, who
believe the entity holding the hedging instrument should
have the same functional currency as that of the holding company with the exposure, and would also create a GAAP difference with US GAAP.
These conclusions have since been reflected in a draft IFRIC
interpretation, D22, on Hedges of Net Investments in Foreign
Operations. Comments on the draft were due with the IASB
by 19 October 2007.
In practice, assuming these conclusions are confirmed,
they are likely to create opportunities for companies hedging
net investment exposures at the sub-group level, since it
should now be clear that these strategies can qualify for net
investment hedge accounting. In this respect, IFRIC’s conclusions are well aligned with risk management practices
prevalent in the market with the exception of point 3 above
(since hedgers would generally apply the functional currency
Figure: NET INVESTMENT HEDGES
100%
Yen 400,000 m
CHF 300 m
External
Borrowings
Sub A
FC = Yen
Parent
FC = EUR
PC = USD
100%
GBP 500 m
Sub B
FC = GBP
CHF 300 m
External
Borrowings
100%
CHF 300 m
Sub C
FC = CHF
Source: PricewaterhouseCoopers LLP
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concept in practice). In respect of hedges to the group presentation currency, these would no longer be allowed for companies where the presentation currency is other than the functional currency of the holding company. This will create
problems for the handful of companies for whom this is the
case, likely causing such companies to cease hedging to the
presentation currency.
2.2 Portions of risk. IAS 39.81 currently states
“If the hedged item is a financial asset or financial liability, it may
be a hedged item with respect to the risks associated with only a
portion of its cash flows or fair value (such as one or more selected
contractual cash flows or portions of them or a percentage of the
fair value) provided that effectiveness can be measured.”
In recent years a number of issues have been submitted to
IFRIC in relation to what can be considered a portion of a financial instrument for hedge accounting purposes. These
have included questions on whether exposures can be hedged
for only a part of their time to maturity, whether inflation is
a hedgeable portion of interest rates risk, and whether exposures designated as one-sided contain time value.
IFRIC noted that a portion cannot be a «residual»; that is,
the portion must have a separately measurable effect on the
hedged item or transaction. Beyond this, however, IFRIC was
unable to identify, either within IAS 39 or elsewhere, any
principle that could be used as a basis for defining what is and
what is not allowed as a hedged item.
Given the issue was not resolved it was eventually pushed
up to the level of the IASB.
The Board’s initial considerations focused on whether
IAS 39 should specify the risks that are eligible for designation as hedged risks, on top of the current principle that the
hedged risks must be identifiable and separately measurable.
In other words, the Board needed to decide whether to adopt
a principles-based or rules-based approach to resolving the
issue. It finally chose the rules-based approach, whereby
IAS 39 would specify the risks that qualify for designation as
a hedged risk and would further specify a finite list of what
qualifies as a hedgeable portion of a cash flow for hedge accounting purposes.
The IASB’s proposal on this matter is now contained in the
Exposure Draft (ED) of Proposed Amendments to IAS 39 –
«Exposures Qualifying for Hedge Accounting». The ED proposes to allow the following exhaustive list of risks which can
qualify for hedge accounting:
é Market interest rate risk. é Foreign currency risk. é Credit
risk. é Prepayment risk. é Risks associated with the cash
flows of a financial instrument that are contractually specified and are independent of the other cash flows of the same
financial instrument.
In addition, the ED specifies the following finite list of allowable portions of cash flows of a financial instrument:
é So called «partial term» hedges, being hedges of only part
of the time to maturity. é Hedges of a percentage of cash
flows (a proportion). é One-sided risks (particularly relevant
when hedging with options). é Independent cash flows, such
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INSTRUMENTS FINANCIERS
as a specific interest payment or receipt. é Portions equivalent to the risk-free rate. é Portions equivalent to a fixed or
variable inter-bank rate.
The ED also suggests that the time value of options may not
be considered effective, even in hedges of one-sided exposures. The example given is of a fair value hedge, though the
exact rationale is not clear (the wording suggests that time
value is represented by a cash flow, which is not the case) and
the example refers to a hypothetical derivative, which would
normally only be relevant in a cash flow hedge. The IASB can
expect comments on this point, since many believe that a onesided risk exposure inherently contains time value, as is specifically recognised in US GAAP (DIG issue G20). In the absence of any difference between the US and IFRS standards
in this area, it seems odd that the IASB would preclude IFRS
reporters from using this same technique.
Importantly the scope of the ED is restricted to financial
items, meaning that hedges of non-financial risks (such as
commodity exposures) are excluded. This will doubtless result in some concerns being expressed by commodity hedgers
during the comment process. Note that IAS 39 currently allows non-financial exposures to be designated only for the
entirety of their risks, including in particular basis risks, creating significant, sometimes insurmountable, ineffectiveness.
This is particularly unfortunate, since the last item in the list
of allowable risks (contractually-specified and independent
cash flows) would apply perfectly to certain non-financial
exposures. This would resolve at least some of the many difficulties commodity hedgers currently experience when seeking hedge accounting. In general, it appears odd that the
IASB continues to make this, now artificial, distinction between financial and non-financial risks, when the same underlying principles should apply to both.
The Board noted in its discussions that the proposed
amendment is not intended to change existing practice, although the Basis for Conclusions expressly recognises that
there may be changes for certain hedging strategies. This implies that, whilst as far as possible the ED is intended as a
clarification of the Board’s intentions and not a fundamental
change to the standard, in some cases it would result in real
changes to the way IAS 39 has been applied.
By coming up with specific lists of what exposures may
qualify for hedge accounting, rather than identifying an
overarching principle which could then be applied to any
situation, the Board expressly recognises it is adopting a
rules-based approach. Many commentators will doubtless
feel that this is unfortunate and that a broad principle would
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have been preferable. Many will of course also see here the
influence of the more rules-based approach of US GAAP. The
start of the slippery slope in this case was the failure in both
the Board’s and IFRIC’s attempts to identify an acceptable
and robust principle which could be clearly articulated and
applied in practice to this complex subject.
One obvious pitfall of rules-based standard setting in this
case is the risk that perfectly sensible risk management strategies which are not on the lists in the ED would not qualify
for hedge accounting. Recognising this fact, the IASB is asking respondents specifically to comment on what types of
risks or hedged items might be missing from the ED’s lists.
Alternatively respondents might also want to attempt to identify for the IASB the elusive “principle” that would avoid the
need to produce an exhaustive list.
2.3 In the pipeline: a revolution? Finally in this article we
take a short look at three documents which may give some
insight into what the road ahead might look like. The IASB
has expressly stated that it is looking to replace IAS 39 and
has established the Financial Instruments Working Group,
to help advise on what this longer-term solution should be.
In the meantime both the Memorandum of Understanding
agreed with the FASB as well as the proposed ED on IFRS for
SME make interesting reading, as do the proposals of a small
sub-group of corporate treasurers who form part of the IASB’s
Financial Instruments Working Group.
The Memorandum of Understanding which lays out the
convergence process was signed in February 2006 by the IASB
and the FASB and has been blessed by the US Securities and
Exchange Commission (SEC) and the European Commission.
According to the memorandum, the Boards will begin work
on substantial improvements in areas where IFRS and US
GAAP are judged deficient, so as to permit removal of the
requirement for companies to reconcile their IFRS accounts
to US GAAP by 2009. The convergence programme envisages
completion not before 2011 or 2012.
Under the MoU the boards agreed to a goal of issuing a due
process document on financial instruments before 1 January
2008.
From the Board’s discussions, it is clear that one fundamental objective is likely to be that all financial instruments
should be recorded at fair value through profit or loss. The
key question then arises as to whether any exceptions, probably in the form of hedge accounting, should be allowed.
Clearly the objective here will be to minimize the scope of any
such exceptions, though the Board will, inter alia, need to
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look into risks, such as FX and commodity price risks, arising
from non-financial transactions which are themselves not
carried at fair value through P & L.
For an indication on the IASB’s recent thinking on hedge
accounting, the proposed Exposure Draft for SMEs is of interest. The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are
appropriate for smaller, non-listed companies.
In respect of hedge accounting, the ED focuses on the types
of hedging that the Board believes an SME is likely to engage
in. Specifically, it allows hedge accounting only for hedges of:
é Interest rate risk of a debt instrument measured at amortised cost. é The foreign currency exposure in a commitment
or a highly probable forecast transaction. é The commodity
price risk exposure in a commitment or highly probable forecast transaction. é The foreign currency risk exposure in a
net investment in a foreign operation.
Interestingly, provided the other usual documentation requirements are met, the SME standard does not require the
entity to perform any effectiveness test. This is perhaps an
indication of the Board’s recognition that, given that all ineffectiveness is recognised in P & L anyway under the current
rules, the additional value of the effectiveness test is somewhat limited.
Comments on the SME ED were due by 1 October 2007.
We close this article with a glimpse at the proposals of a subgroup of the IASB’s Financial Instruments Working Group.
This sub-group, composed of corporate treasury professionals, has provided the IASB with its thoughts on possible
long term solutions to simplifying hedge accounting. The
proposals expressly do not focus on financial institutions, but
rather on the treasury activities of non-financial corporates.
In a nutshell, this group proposes:
é That all financial assets and liabilities be carried at fair
value on the balance sheet (in order to be consistent with the
ground rules laid out by the IASB). é That the held-to-maturity category be eliminated (it is anyway barely used in practice). é That fair value changes on financial assets and liabilities be taken either to equity or to P & L, and that re-designation between P & L and equity treatment should be possible
prospectively at any time (the purpose being to achieve an
effect similar to fair value hedge accounting when needed,
and eliminate the need for hedge accounting). é Cash flow
hedge accounting should be retained, but the effectiveness
test and similar items tests should be eliminated. é Commodity risk management should be considered further to
resolve some of the issues commodity hedgers face, notably
around basis risk.
4. CONCLUSION
So after a quiet period in 2006, we see interesting times ahead
in accounting for financial instruments. It will certainly not
be an easy ride, but the author encourages readers to stay connected to developments and to comment on the current exposure drafts.
n
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Nouveautés IAS 39 – deux changements et une révolution ?
Après de nombreuses années de changements, révisions et adaptations régulières, l’année 2006 fut relativement calme,
avec peu de modifications dans les normes relatives à la comptabilisation des
instruments financiers en IFRS.
L’International Financial Reporting Interpretations Commitee (IFRIC), le sous-comité d’interprétation de l’International
Accounting Standards Board (IASB), a lancé
en 2006 des discussions qui devraient
déboucher sur de nouveaux changements
dans les années à venir. L’article développe essentiellement deux sujets, présentés succinctement, et sur lesquels le
débat est maintenant ouvert.
1. Couvertures d’investissements
nets dans des filiales étrangères
Lors des discussions entamées sur la
couverture des investissements nets,
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l’IFRIC s’est interrogé sur de la possibilité d’appliquer une comptabilité de couverture (hedge accounting) à certaines
stratégies de gestion du risque de change
émanant de filiales étrangères. Il a également abordé le problème du niveau au
sein de la structure du groupe où la couverture est logée (maison mère? filiale?).
Les sujets discutés par les membres de
l’IFRIC et leurs conclusions se présentent comme suit (IFRIC D22):
é l’IAS 21 n’envisage aucune méthode
particulière pour la consolidation (besoin ou non d’effectuer une consolidation par paliers) et la méthode adoptée
par l’entreprise ne devrait avoir aucun
impact sur la disponibilité d’une comptabilité de couverture des investissements nets; é la comptabilité de couverture peut se faire contre toute devise
fonctionnelle de holding ou de sous-
holding du groupe, mais ne dépend en
aucun cas de la devise de présentation
des comptes.
Si ces conclusions sont adoptées, cela
risque de poser problème pour les entreprises dont la devise de présentation est
différente de la devise fonctionnelle de
la holding et qui se couvrent par rapport
à cette devise de présentation.
2. Portions de risques financiers
L’IAS 39.81, bien que permettant d’appliquer une comptabilité de couverture
pour des «portions» de risques, ne définit pas de manière claire ce qu’il faut
comprendre par «portion» (p. ex.: l’inflation est-elle une sous-composante
du taux d’intérêt?).
L’IASB et l’IFRIC tentent de clarifier
cet aspect de la norme et pour cela pro-
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posent de modifier l’IAS 39 en créant
deux listes exhaustives de risques susceptibles d’être qualifiés de risques couverts, qui comprennent notamment:
é les risques financiers disposant des
conditions requises pour la comptabilité de couverture (hedge accounting):
risque de crédit, risque de change, etc.;
é les portions de cash-flow d’instruments financiers pouvant être couvertes
(p. ex.: cash-flows contractuels et indépendants, portion équivalente au
taux sans risque, etc.).
À noter que ce projet de modification de
l’IAS 39 ne concerne, pour l’instant, que
les risques et produits financiers, alors
que certains de ces principes auraient pu
être appliqués pour résoudre diverses
difficultés rencontrées par les entreprises couvrant les risques sur les matières
premières.
L’IASB sollicite des commentaires sur
ces propositions.
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3. Solutions à plus long terme
Par ailleurs, des solutions à plus long
terme sont étudiées par l’IASB, qui a mis
en place un groupe de travail (Financial
Instruments Working Group).
Par le biais du «Memorandum of Understanding», signé en 2006 avec le Financial Accounting Standards Board
(FASB) et approuvé par la SEC et la Commission européenne, l’IASB va travailler
à des améliorations possibles dans les domaines où les IFRS et les US GAAP sont
jugés déficients. L’un des objectifs fondamentaux serait d’enregistrer tous les
instruments financiers dans la catégorie
«fair value through profit or loss» ou tout
du moins de minimiser les exceptions.
Parmi les pistes également étudiées
par l’IASB figure un ensemble de principes comptables simplifiés et adaptés
aux petites et moyennes entreprises non
cotées. L’approche proposée pour les
couvertures comptables se focalise sur
les types de couverture régulièrement
utilisés par une PME. La comptabilisation de la couverture est autorisée uniquement pour 4 types de couvertures
(p. ex. risque de taux d’un instrument de
dette au coût amorti). Il ne serait pas nécessaire pour la PME d’effectuer un test
d’efficacité.
La dernière proposition à l’étude provient d’un groupe composé de trésoriers
d’entreprise. Il s’agit d’envisager une
simplification de la comptabilisation des
produits de couverture. Parmi les propositions se trouvent: la suppression de
la catégorie «détenu jusqu’à l’échéance»,
l’élimination du besoin d’effectuer un
test d’efficacité, l’enregistrement des
actifs et passifs financiers à leur valeur
de marché au bilan, avec flexibilité entre
compte de résultat et fonds propres
quant aux gains et pertes sur la période
comptable.
Après une année 2006 relativement
calme, il faudra donc se préparer à relever de nouveaux défis. SP
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