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Exposure Draft Hedge Accounting: Challenges or Opportunities?

by Yin Toa Lee, Partner and Financial Services Leader, Ernst & Young, Financial Accounting Advisory Services, Asia Pacific


The International Accounting Standard Board (the Board) completed deliberation in September 2011 to make significant changes to proposals in the Exposure Draft Hedge Accounting (ED) issued in December 2010, being the proposals for the third part of IFRS 9, the project to replace IAS 39.

The main objective of the ED is to simplify hedge accounting to provide a better linkage between an entity’s risk management strategy, the rationale for hedging and the impact of hedging on the financial statements. The proposals represent a fundamental shift from the way entities have applied hedge accounting in the past.

The IASB’s efforts are welcomed by market participants to reduce complexity of hedge accounting that can be applied for both financial services and corporate entities. However, although market participants are supportive of the overall intent and direction of the proposals, they are interested in clarifying the wording of the ED to make the ED more operational.

Proposed hedge accounting model

Using a more principles based approach, financial reporting would reflect more accurately how an entity manages its risk and the extent to which hedging practices mitigate those risks as a result of these proposals.