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IFRS: Derivative Accounting Direction
- 1. IFRS: Derivative Accounting Direction April 17th, 2012 Presented by: Helen Kane, President
- 2. International Financial ReportingStandard • 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 2 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 3 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 4 rendering of accounting advice and is not a substitute for such professional advice or services.
- 5. Current Events -FASB Project exists to replace Financial Instruments Guidance including Hedge Accounting • ASU Issued on Derivatives & Hedge Accounting Exposure Draft, 5/2010 • ………………………………………………. © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 5 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 6 rendering of accounting advice and is not a substitute for such professional advice or services.
- 7. Comparison Flow IFRS 9 Preliminary Conclusions © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 7 rendering of accounting advice and is not a substitute for such professional advice or services.
- 8. Comparison Flow ASC 815 ASC 815 Current Guidance ASC- ED ASC-Proposed Update Exposure Draft May 26, 2010 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 8 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 9 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 10 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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) © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 11 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 12 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 13 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 14 rendering of accounting advice and is not a substitute for such professional advice or services.
- 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 15 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 16 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 17 rendering of accounting advice and is not a substitute for such professional advice or services.
- 18. Qualifying Hedged Items ASC815 • 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 18 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” © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 19 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 • © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 20 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 21 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 22 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 23 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 24 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 25 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 26 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 27 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 28 rendering of accounting advice and is not a substitute for such professional advice or services.
- 29. Qualifying Hedged Items ASC815 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 29 rendering of accounting advice and is not a substitute for such professional advice or services.
- 30. Hedge Accounting forCash 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 30 rendering of accounting advice and is not a substitute for such professional advice or services.
- 31. Hedge Accounting forNet 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 31 rendering of accounting advice and is not a substitute for such professional advice or services.
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- 33. IASB Exposure Draft FASBInvitation 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 © 2012 Hedge Trackers, LLC This publication contains general information and does not represent the 33 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 ReferenceParagraphs 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.
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- 37. Answers hkane@hedgetrackers.com Hedge Trackers, LLC Silicon Valley, Chicago, Los Angeles (408) 350-8580 www.hedgetrackers.com