There has been almost no activity by US standard setters with regards to derivative accounting since 2010 the IASB has reached a series of conclusions that they plan to issue before July as IFRS definitive guidance on Derivative and Hedge Accounting. In this session we will review the IASB direction, comparing and contrasting those conclusions with both current guidance under ASC815 and the FASBs proposed changes. This will result in substantial differences for entities preparing separate financials for their international entities.

1. IFRS:
Derivative Accounting Direction
April 17th, 2012
Presented by:
Helen Kane, President

2. International Financial Reporting Standard
• IAS were issued 1973 – 2001 by IASC
• In 2001, the IASB replaced IASC
• Standards IASB issued are called IFRS
• 110 countries have either adopted or allow
IFRS
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3. Background
• August 2008, the SEC proposed that IFRS
replace U.S. GAAP: phase-in by 2014
• July 2011 …the issue and the decision about
potentially incorporating IFRS into the U.S.
reporting regime is a major decision for this
agency…must carefully consider and
deliberate whether incorporating IFRS into
our financial reporting system is in the best
interest of U.S. investors and of U.S. markets.
• Commission directed the staff to execute a
work plan
• Nov 2011, the SEC staff prepared a comparison
of US GAAP and IFRS
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4. Current Events - IASB
Project exists to replace IAS 39 with IFRS 9
• Phase 1-- Classification and Measurement
• Phase 2-- Amortized Cost and Impairment,
• Phase 3-- Issued Hedge Accounting
Exposure Draft, 6/11
To be applied prospectively for annual periods
beginning on or after 1/1/15 with early application
permitted (for all of IFRS 9)
• Staff draft released to web Q2 2012
• Release of Hedge Accounting Guidance 2nd half 2012
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5. Current Events - FASB
Project exists to replace Financial Instruments
Guidance including Hedge Accounting
• ASU Issued on Derivatives & Hedge
Accounting Exposure Draft, 5/2010
• ……………………………………………….
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6. Exposure Draft Objectives
IFRS:
• A comprehensive review of hedge accounting
requirements, to establish a more objective-
based approach to hedge accounting and align it
with an entity's risk management processes
FASB:
• Simplify hedge accounting to improve
compliance
• Make financial reporting of hedge activities
useful and transparent
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rendering of accounting advice and is not a substitute for such professional advice or services.

7. Comparison Flow
IFRS 9 Preliminary Conclusions
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8. Comparison Flow
ASC 815
ASC 815
Current Guidance
ASC- ED
ASC-Proposed Update
Exposure Draft
May 26, 2010
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9. “Virtual Derivatives” - IFRS
• Normal Purchase Normal Sale is Assumed
• “Own Use” contracts may take the fair value
option under IFRS 9
• Only if doing so eliminates or significantly reduces an
accounting mismatch
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10. “Virtual Derivatives” – US GAAP
ASC 815
• Documentation required to scope out normal
purchase/normal sale contracts from Derivative Accounting
requirements
• Climatic/geological contracts scoped out
ASC- ED
• No significant change
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11. Qualifying Hedge Instruments - IFRS
• Nonderivative financial assets and liabilities
measured at fair value in P&L eligible as
hedging instrument
• Interco balances can be designated for FX risk
only
• Combination of written and purchased option
purchased as single or multiple contracts
(cannot be net written option)
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12. Qualifying Hedging Instrument – US GAAP
ASC 815
• Non derivative financial instruments are not permitted to be
a hedging instrument (except as FX hedges of Net
Investment or Fair Value)
ASC- ED
No significant change
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rendering of accounting advice and is not a substitute for such professional advice or services.

13. Qualifying Hedged Risks- IFRS
• “something other than the entire fair value
change or cash flow variability of an item, i.e. a
component”
• Separately identifiable and reliably measured
• For financial and non-financial items
• New non-financial examples
• Inflation: with warnings and examples of when
inflation does/does not qualify
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rendering of accounting advice and is not a substitute for such professional advice or services.

14. Qualifying Hedged Risks – US GAAP
ASC 815
• Hedged risk limited to:
• Benchmark interest rates
• Foreign Exchange
• Credit
• Overall
ASC- ED
No significant change
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15. Hedged Items - IFRS
• Equity Investments designated at fair value
through OCI under IFRS 9
• Note: Under currency accounting gains and
losses on AFS securities are recorded in P&L,
therefore special hedge accounting not required
to align currency earnings effect of hedge with
security
• Layer-based designation of a hedged item
• Limitations if hedged item is prepayable
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rendering of accounting advice and is not a substitute for such professional advice or services.

16. Qualifying Hedged Risks – US GAAP
ASC 815
• Cash flow or fair value accounting permitted to align
currency related earnings effect of hedge and AFS Security
• Fair value and net investment underlying designated as
proportion
ASC- ED
No significant change
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rendering of accounting advice and is not a substitute for such professional advice or services.

17. Hedged Items - IFRS
• Groups/Net Positions
• Designation of an aggregated exposure permitted
• Longs & shorts may be aggregated
• Grossed up for tracking
• Netting may equal nil position
• Cash flow hedges of net positions would available
only for hedges of foreign currency risk
• No alignment required on timing of aggregated
exposures in income
• Gains & losses on net positions to a separate line
item in the income statement
• Not the line items affected by the transactions
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rendering of accounting advice and is not a substitute for such professional advice or services.

18. Qualifying Hedged Items
ASC 815
• Groups of similar items can be hedged together
• Back to back hedging allows centralized treasury to hedge
netted exposures from different entities
ASC- ED
No significant change
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rendering of accounting advice and is not a substitute for such professional advice or services.

19. Effectiveness Testing - IFRS
• Expectation of other than accidental offset and
meets objective of strategy
• Meet 2 criteria
• There is an economic relationship between the hedged
item and the hedging instrument
• The effect of credit risk on the hedge instrument does
override the economic relationship
• No retrospective testing
• No “bright lines”
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rendering of accounting advice and is not a substitute for such professional advice or services.

20. Hedge Effectiveness Testing – US GAAP
ASC 815
• Prospective and retrospective testing required at inception and each
reporting date
• Short-Cut, Matched Terms, critical term comparison, dollar-offset analysis,
regression
• “Highly Effective” Expectation
ASC- ED
• Inception evaluation with limited additional testing
• Qualitative Evaluation
• Reasonably Effective
• No Short-Cut
• No Matched Terms
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rendering of accounting advice and is not a substitute for such professional advice or services.

21. Effectiveness Testing - IFRS
• Balancing/Rebalancing
• Ensure that hedge relationship does not produce
and unbiased result: reduce ineffectiveness
• Precludes balancing to achieve an accounting outcome
• Rebalance required when notional on instrument
or hedged item changes in response to changes in
hedge ratio
• The replacement or rollover of a hedge
instrument is not an expiration (dedesignation)
if contemplated in documentation
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rendering of accounting advice and is not a substitute for such professional advice or services.

22. Hedge Effectiveness Testing – US GAAP
ASC 815
• No prohibition against deliberate mismatch of hedge item
and derivative to create over or under hedging
• Changes in any of the critical terms of the instrument or
hedged item would require dedesignation
ASC- ED
No significant change in mismatch
Adjustments to derivative notionals will require
amendment of inception documentation, not
dedesignation
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rendering of accounting advice and is not a substitute for such professional advice or services.

23. Time Value Accounting - IFRS
• Options
• Time value reclass to income depends on
transaction type:
• Amortizes “rationally” over the life of the existing
asset/liability
• Recorded when hedged transaction impacts earnings
• Forwards
• Amortize forward points at designation
“rationally over time”
• Offset to OCI
• No geography discussion
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rendering of accounting advice and is not a substitute for such professional advice or services.

24. Time Value Accounting – US GAAP
ASC 815
• For hedges of intrinsic value record option time value
changes in P&L to reflect market changes
• For hedges of total changes under G20 concepts effective
time value is reclassified to P&L with hedged item
ASC- ED
Option premium expense to amortized to income in
“rational way”
Offset to OCI
Nothing specific on geography
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rendering of accounting advice and is not a substitute for such professional advice or services.

25. Cash Flow Accounting - IFRS
• Values in OCI will be reclassed to balance
sheet rather than held until earnings impact
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rendering of accounting advice and is not a substitute for such professional advice or services.

26. Qualifying Hedged Items – US GAAP
ASC 815
• Values in OCI will be reclassed to income when the hedged
item impacts earnings
ASC- ED
No significant change
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rendering of accounting advice and is not a substitute for such professional advice or services.

27. Voluntary Dedesignation- IFRS
• No voluntary dedesignation when strategy and
objective have not changed
• Proactive rebalancing available
• Guidance will expand to highlight hedge
relationships that “automatically convert to a
natural hedge” (FX)
• Change in hedge objective can terminate
relationship
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rendering of accounting advice and is not a substitute for such professional advice or services.

28. Voluntary Dedesignation – US GAAP
ASC 815
Company permitted to dedesignate hedge relationship
Automatic dedesignation of fx recognized
ASC- ED
No voluntary dedesignation
Compensating contract must be documented to cease
hedge relationship
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rendering of accounting advice and is not a substitute for such professional advice or services.

29. Qualifying Hedged Items
ASC 815 IAS 39
FX risk on firm or anticipated FX risk on firmly committed
acquisition of business not a acquisition of business
qualifying hedged item qualifies for special hedge
accounting
• Gain/loss reclassed to income
with impairment or disposal
of entity
ASC- ED IASB-ED
No significant change No significant change
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rendering of accounting advice and is not a substitute for such professional advice or services.

30. Hedge Accounting for Cash Flow Exposures
ASC 815 IAS 39
Gains/losses on anticipated Gains/losses on anticipated
transactions possible but transactions stay in OCI until no
not probable of occurring longer expected to occur
stay in OCI until probable No specified 2-month extension of
not to occur hedge period
2 additional months for
hedged item to occur
ASC- ED IASB-ED
No significant change No significant change
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31. Hedge Accounting for Net Investment
ASC 815 IAS 39
Gains/losses on Net Investments Gains/losses on Net Investments in
remain in OCI/CTA until OCI/CTA reclassified upon
substantial liquidation of disposal or partial disposal of
subsidiary foreign operation
ASC- RECENT ED IASB-ED
Gains/losses on Net No significant change
Investments in OCI/CTA
reclassified upon disposal or
partial disposal of foreign
operation
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rendering of accounting advice and is not a substitute for such professional advice or services.

32. Resources

33. IASB Exposure Draft
FASB Invitation to Comment:
Background
Questions (from FASB) for Respondents
High Level Comparison
Original IASB Exposure Draft
http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%
2FDocument_C%2FDocumentPage&cid=1176158233827
IASB Exposure draft direct:
Guidance, Basis for Conclusions, Illustrations
http://www.ifrs.org/Current+Projects/IASB+Projects/Financial+Instruments+A+Replacement+of+I
AS+39+Financial+Instruments+Recognitio/Phase+III+-+Hedge+accounting/edcl/ed.htm
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rendering of accounting advice and is not a substitute for such professional advice or services.

34. Additional resources
• Deloitte (http://www.iasplus.com)
• IASB (www.iasb.org)
• FASB (www.fasb.org)
• Securities and Exchange Commission
(www.sec.gov)
© 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 34
rendering of accounting advice and is not a substitute for such professional advice or services.

35. ASC Update Reference Paragraphs
ASC- Proposed Update Derivative & Hedging
Guidance
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwher
e=1175823559151&blobheader=application%2Fpdf
Questions from FASB on hedging
• Questions 56-58 and 61-64
Proposed guidance: ¶110-128
Implementation guide: ¶IG172-180
Background/conclusions: ¶ BC216-235
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocumen
t_C%2FDocumentPage&cid=1176156904144
© 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 35
rendering of accounting advice and is not a substitute for such professional advice or services.

36. Questions

37. Answers
hkane@hedgetrackers.com
Hedge Trackers, LLC
Silicon Valley, Chicago, Los Angeles
(408) 350-8580
www.hedgetrackers.com