IASB seeks improvement for macro hedging accounting

An effort to create a more accurate depiction of risk management activities known as “macro hedging” in financial reporting is reflected in a discussion paper released Thursday by the International Accounting Standards Board (IASB).

The IASB is inviting comment on a possible new approach to accounting for macro hedging because it says the existing requirements of IAS 39, Financial Instruments: Recognition and Measurement, are difficult to apply.

“Current requirements make it difficult to faithfully represent dynamic risk management in entities’ financial statements and can increase operational complexity,” IASB Chairman Hans Hoogervorst said in a news release. “This discussion paper sets out preliminary views on an accounting approach that better reflects the economics of dynamic risk management as compared to the current accounting requirements.”

A project to replace IAS 39 with a new standard known as IFRS 9, Financial Instruments, is in its final stages. But the IASB is treating the macro hedging component of these changes separately in order to seek views from a broad range of constituents.

Management of risks is performed by financial institutions and other organizations as a continuous process that evolves over time along with the risks. Risks such as unexpected interest rate fluctuation often are managed on a portfolio basis rather than on an individual contract basis.

The discussion paper seeks public comment on a possible approach to accounting for these risk management activities, known as the portfolio revaluation approach. Under this approach:

• Exposures that are risk-managed dynamically are revalued for changes in the managed risk through profit or loss.
• Fair value changes arising from instruments that are used to manage this risk (derivatives) are also recognized in profit or loss.
• The success of an entity’s dynamic risk management is captured by the net effect of the measurements in profit or loss.
• Fair valuation of the risk exposures that are dynamically managed is not required.

The approach is designed to meet the needs of users by providing more comprehensive disclosures about an entity’s dynamic risk management activities.

Comments will be accepted through Oct. 17 on the IASB’s website.

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