The International Accounting Standards Board (IASB) has released a draft final standard with revised proposals on hedge accounting that should allow entities to better reflect their risk management activities in the financial statements. When it is published in final exposure form, the framework will form part of IFRS 9, Financial Instruments.

The draft is for review only and there will not be a feedback mechanism at this stage. IASB plans to prepare a final exposure draft after a 90-day holding period.

The proposals are designed to provide a stronger link between an organisation's risk management activities, the rationale for hedging, and the impact on the financial statements.

Tony Clifford, Ernst & Young's Global IFRS financial instruments leader, says: 'We welcome the IASB's new proposals for a hedge accounting model because they are more principle-based, less complex, more linked to an entity's risk management activities, and can be consistently applied in all industry sectors.

'The current hedge accounting model includes complex rules, some arbitrary limits, and onerous hedge effectiveness testing that often result in an entity not being able to apply hedge accounting to its economic hedging relationships.'

There are a number of improvements to the existing standard, including measures aimed at non-financial services entities, which typically enter into contracts to buy or sell non-financial items that contain various risk components, such as foreign exchange risk, commodity price risk and basis risk.

Clifford added: 'Hedge accounting will now be permitted for individual risk components of non-financial items, provided the entity can separately identify and reliably measure the risk component that is actually hedged. One example commonly used is the hedge of the crude oil component of a jet fuel purchase.'

The IASB is not seeking comments on the draft, which is being made available for information purposes to enable constituents to familiarise themselves with the document.

The draft will remain on the website until early December 2012. The Board plans to finalise the draft document in early 2013.

Download the IASB draft document HERE