E&Y warns about IAS banking rules
Ernst & Young has warned that proposed changes to International Accounting Standards governing hedging could cause more transitional problems.
Link: IAS special report
Tony Clifford, banking and regulatory partner, said the recent change of heart by the IASB on the criteria for prospective effectiveness testing will mean that many hedges will no longer be eligible for hedge accounting.
Rather than allow hedges where changes in fair value or cash flows of the hedged item have to be between 80% to 125%, the board is now expected to limit hedge accounting to a 95% to 105% range.
E&Y complained that it was often not possible to find derivatives that exactly match in terms of amounts, tenure, and interest rates.
‘At least the use of an 80% to 125% range made such an exercise feasible. Going forward, without this degree of flexibility, it will often be much more difficult to allocate external derivatives against external assets or liabilities for hedging purposes,’ Clifford said.