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IFRS 9 Hedging – Was it Worth the Wait? (part one)

by Clarette du Plooy, Director, Corporate Treasury Solutions and Kees-Jan de Vries, Director, Capital Markets and Accounting Advisory Services, PwC

In November 2013, the IASB issued the long-awaited IFRS 9, ‘Financial instruments’, which replaces hedge accounting under IAS 39. The new standard responds to a number of needs:

  • to improve the previous accounting standards for financial instruments, particularly given the increased use and sophistication of hedge accounting; and
  • to address a number of accounting issues that emerged as a result of the financial crisis in 2008, especially with respect to the IAS 39 impairment model.

Treasurers and accountants have often complained that the hedge accounting requirements under IAS 39 were onerous, complicated and not really useful to the readers of financial statements. For example, IAS 39 comprises around 300 pages of the total 2,800 pages of IFRS, so 10%. Much of these 300 pages cover detailed hedge accounting guidance and rules. In practice, accounting has become a key driver in how treasurers manage risk, instead of reflecting how management decides to manage financial risks. This is especially true where companies are hedging commodity risks.

The good news for treasurers is that hedging under IFRS 9 will be both easier and more aligned with risk management. The bad news is that documentation is still required in order to qualify for hedge accounting. And although effectiveness testing as we know it today will no longer be required, there is a new requirement to maintain a hedge ratio and rebalance where needed. Accounting ineffectiveness will also continue to affect income statements.