Bank of England hedges IAS39 bets

It stated that it would not apply the hedge accounting rules of IAS39, which
sets out how financial instruments are recognised and measured. ‘The Bank has
not applied the hedge accounting rules of IAS39 and accordingly has recognised
all gains and losses on derivatives in the income statement,’ the Bank said in
its annual report.

The bank’s decision not to apply IAS39 in reporting its derivatives will be
seen as a damaging slight to the efficacy of the standard.

Powerful industry representatives and accountancy giants have also issued
criticisms. Melissa Allen, who chairs the International Swaps and Derivatives
Association’s European accounting committee, sent a stinging letter to IFRIC
chiefs stating that ‘the existing cash flow hedging requirements of IAS39 are
open to different interpretations and perhaps more crucially, are currently
being read differently by the major independent audit firms’.

PricewaterhouseCoopers backed up the claims: ‘We believe that the fair-value
option should apply to both financial and non-financial host contracts with
embedded derivatives.’

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Fiona Westwood of Smith and Williamson.