As part of a range of amendments to rules for accounting for financial instruments, the International Accounting Standards Board (IASB) has introduced a new hedge accounting model, with corresponding disclosures concerning risk management activity.
The changes follow concerns from preparers about the difficulty of appropriately reflecting their risk management activities in the financial statements.
The changes also address concerns raised by users of the financial statements about the difficulty of understanding hedge accounting.
The IASB said that the new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk management activities in their financial statements.
Non-financial institutions will find the new model particularly interesting since the most significant improvements apply to those that hedge non-financial risk. As a resul, users of the financial statements will be provided with better information about risk management and about the effect of hedge accounting on the financial statements.
In addition, the board's amendments also allow changes to address the 'own credit' issue included in IFRS 9, Financial Instruments, permitting application in isolation without the need to change any other accounting for financial instruments.
The changes also remove the 1 January 2015 mandatory effective date of IFRS 9, to provide sufficient time for preparers of financial statements to make the transition to the new requirements.
The IASB decided that a new date should be decided upon when the entire IFRS 9 project is closer to completion. The November amendments remove the mandatory effective date from IFRS 9. However, entities may still choose to apply IFRS 9 immediately.
Chairman of the IASB, Hans Hoogervorst, said that the package includes 'several, long-awaited reforms to financial instruments accounting.'
'First, we have introduced a new hedge accounting model. This is a significant change in accounting that enables companies to better reflect their risk management activities.
'This change has received strong support from corporates around the world. Second, we have provided a mechanism to enable entities to benefit from the fix to the 'own credit' issue before making more comprehensive changes to their financial instruments accounting.
'Third, we have responded to concerns that the mandatory effective date for IFRS 9 provided insufficient time for companies to adequately prepare,' said Hoogervorst.
Commenting on the publication of the final standard, Dr Nigel Sleigh-Johnson, head of ICAEW's Financial Reporting Faculty, said: 'The current hedge accounting standard is rules-based, is difficult for companies to use and does not reflect risk management activities well, so it was ripe for replacement.
'With the new standard, hedge accounting - which is a way for companies to reduce volatility in their reported results stemming from, for example, foreign currency exposure, and is widely used by both financial and non-financial companies - should become more accessible, allowing companies to better align their accounting with their risk management strategies.'
The amendments can be viewed HERE
