The end of hedge accounting under IAS 39?

The end of hedge accounting under IAS 39?

Transition from IAS 39 to IFRS 9 relating to hedge accounting

Ralph Schilling

Partner, Financial Services, Head of Finance and Treasury Management

KPMG AG Wirtschaftsprüfungsgesellschaft

Hedge Accounting

In recent newsletter articles we have repeatedly discussed the improvements in IFRS 9 concerning hedge accounting when compared with IAS 39. However, there are still plenty of companies that have elected to continue applying IAS 39 for hedge accounting as they transition to IFRS 9. This standard setter permits this for the transition period until the project on Macro Hedge Accounting has been finalized, which is currently being continued under the name 'Dynamic Risk Management'.

Originally, the transitional period was to end at the end of 2017. At present, no new date has been set. After some delays, however, the project is now picking up speed again, and in October 2020 the so-called "Core Model Outreach" took place, with feedback on the core model expected in Q2 2021. That is why we would like to use a tangible example in this article to illustrate what it means for companies to end the use of hedge accounting under IAS 39 in practice.

The companies that currently still apply IAS 39 largely use interest rate and currency hedges. Using the so-called 'hypothetical derivative method' under IAS 39 provides two key advantages for these hedges. Their effectiveness is easy to measure, as the hypothetical derivative is often a reflection of the derivative that was actually entered into. As a result, there are usually no significant sources of ineffectiveness under IAS 39. This approach cannot, however, be easily transferred to IFRS 9. For example, when hedging with forward exchange contracts or cross-currency interest rate swaps, the currency basis mentioned in IFRS 9 may not be included in the hypothetical derivative, despite the fact that it is always part of the actual derivative.

Clearly, this example shows that hedge relationships are not readily transferable from IAS 39 to IFRS 9 and that the change to IFRS 9 will not simply be a matter of rewriting the hedge documentation. What does this mean for companies that still use hedge accounting under IAS 39? 

The changeover of hedge accounting to IFRS 9 will definitely come, even if it is not expected for 2021. However, there may be several advantages to starting the implementation already next year. In this context, some questions that should be asked are:

  • Which reporting options does IFRS 9 offer for my hedging relationships?
  • What are their pros and cons?
  • Can I continue to reduce unplanned fluctuations in the income statement or even reduce them even more compared to the current application status?
  • Is it possible to better align the accounting reporting with my actual risk controlling?
  • What do the leading treasury management systems currently offer in the standard with regard to IFRS 9 accounting and valuation requirements?

In principle, it is always better to adopt new standards in good time and to plan for any IT resources and budgets. Where appropriate, an IAS 39 / IFRS 9 hedge accounting transition can be combined with a treasury management system update or a change of systems that has already been scheduled anyway. An early adoption can avoid being forced to move quickly once the IASB's Dynamic Risk Management Project is finalized.

Source: KPMG Corporate Treasury News, Edition 107, December 2020

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