Derivatives – UK lagging on hedge rules

UK accounting standards on derivatives and hedging investments risk falling behind international consensus, unless the Accounting Standards Board can overcome its indecision, an investment banker has warned, writes John Stokdyk.

‘Hedge accounting has been a bete noir for the ASB, and there seems to be a fair amount of indecision,’ Leon Cane, executive director of CIBC Wood Gundy Oppenheimer, told the English ICA Financial Reporting Conference.

After examining differing definitions and approaches of the ASB, the International Accounting Standards Committee and the US Federal Accounting Standards Board of the US, Cane said: ‘FRS 13: ‘Derivatives and other Financial Instruments: Disclosures’ does not establish the concept of hedging in the same way as the IASC and FASB. The Americans say, “Do it if you think you can, but the burden of proof is on you.” I’m not so convinced that the ASB is right to be so concerned for people.’

ASB member Ken Wild, technical partner for Deloitte & Touche, accepted Cane was justified in highlighting the board’s indecision, but said it was based on important anomalies, for example on whether to report gains and losses from fixed-rate borrowings that have hedging investments against them.

‘I don’t think the world would want us to jump to conclusions until we’ve dealt with some of the problems on an international basis,’ said Wild.

‘The international working party on financial instruments has principles in place, but when they try to apply them, they hit anomalies.’

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