IASB publishes proposals on macro hedging

The International Accounting Standards Board (IASB) has published proposals to improve the implementation of IAS 39 Financial Instruments: Recognition and Measurement. The proposals are set out in an Exposure Draft of proposed amendments to IAS 39.

If adopted the proposals would enable fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk (sometimes referred to as ‘macro hedging’). The Exposure Draft retains the basic principles behind IAS 39 while aiming to reduce the cost of compliance. The detailed proposals are summarised in the attached note.

IAS 39 (along with Japanese and US standards) is one of the three broadly similar approaches in accounting standards that provide comprehensive guidance for the accounting for financial instruments. The need for such guidance is driven by the increasingly prevalent use of financial instruments for both risk management and other operating purposes. At the end of 2002, the Bank for International Settlements estimated that the total estimated notional amount of over-the-counter (OTC) derivatives contracts stood at US$141.7 trillion, and the gross market values of those contracts was $6.4 trillion.* Without a standard such as IAS 39, the use of derivative contracts for an individual company’s accounts would be unknown to investors. Financial instruments would be shown in a company’s financial reports either at cost—which is generally zero—or not at all.

The release of this Exposure Draft is part of the IASB’s continuing process of improving and easing the implementation of IAS 39, a standard developed over a 12-year period by the IASB’s predecessor International Accounting Standards Committee (IASC). The IASB published its first round of proposed improvements for public comment in June 2002.

Based on the comments received and a series of public roundtable discussions held in March 2003, the IASB launched intensive discussions with interested parties, including banking representatives, to find a way within the principles of IAS 39 to accommodate macro hedging. Whilst the discussions did not produce complete agreement on the measurement of hedge ineffectiveness and deposit liabilities, the IASB’s approach set out in the Exposure Draft would mark an important advance by permitting macro hedging. Furthermore, consistently with the IASB’s established due process, the Basis for Conclusions on the Exposure Draft includes a discussion of all views considered, including those of the bank representatives. The Invitation to Comment raises questions about hedge ineffectiveness and deposit liabilities.

Introducing the proposals, Sir David Tweedie, IASB Chairman, said:

“A standard on financial instruments is an essential element of any complete set of accounting standards. Implementing IAS 39 certainly poses challenges, but this reflects the fact that derivatives today are complex instruments, and IAS 39 bridges the world of traditional cost accounting and a model that relies more on market values. In these proposals the IASB has listened to and worked closely with its constituents in making a major breakthrough in the area of macro hedging. We will be actively working with interested parties in the months ahead to ensure that we ultimately reach a well-respected, high quality solution.”
The IASB invites comments on the Exposure Draft by 14 November 2003.

The complete text of the Exposure Draft Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk is freely available from the IASB Website. From 2 September copies of the Exposure Draft (ISBN 1-904230-31-8) will be available, at £5 each (€8/US$7) including postage, from the online bookshop or contact: IASCF Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom. Tel: +44 (0)20 7332 2730, Fax: +44 (0)20 7332 2749. Email:

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