IASB releases new rules to better reflect hedge accounting

New rules released Tuesday by the International Accounting Standards Board (IASB) are designed to improve how hedge accounting activities are reflected in financial statements.

The IASB changed the rules to address preparers’ concerns about the challenges of appropriately representing their risk management activities in financial statements.

The most significant changes apply to entities that hedge nonfinancial risk. Previous rules did not allow hedge accounting to be applied to components of nonfinancial items, even though businesses usually hedge only parts of nonfinancial items.

In some instances, preparers previously were unable to apply hedge accounting to groups of items, even though items often are hedged on a group basis for risk management purposes.

As a result, businesses couldn’t reflect in their financial statements the fact that they were entering into derivatives for hedge accounting purposes. This led to volatility in the financial statements that was inconsistent with the economics of the businesses, according to the IASB.

Users of financial statements also sought simplified hedge accounting, according to the IASB.

The new rules are designed to eliminate those problems and provide improved disclosures that will explain:

• The effect of hedge accounting on the financial statements and the entity’s risk management strategy.
• Details about derivatives entered into by the entity, and the derivatives’ effect on future cash flows.

“This is a significant change in accounting that enables companies to better reflect their risk management activities,” IASB Chairman Hans Hoogervorst said in a news release. “This change has received strong support from corporates around the world.”

The IASB also made changes that:

• Enable entities to change the accounting for liabilities they have elected to measure at fair value before applying any of the other requirements in IFRS 9, Financial Instruments. As a result, gains caused by a worsening in an entity’s own credit risk on such liabilities will no longer be recognized in profit or loss.
• Remove a mandatory effective date from IFRS 9 because the project’s impairment phase has not yet been completed. Entities still may apply IFRS 9 immediately.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.