IASB urged to take its time as hedge talks falter

IASB urged to take its time as hedge talks falter

Meeting of US and international standard setters fails to agree on way forward over hedge accounting

Hedge accounting, the third and final piece of the controversial fair value
standard, has stumbled at its first hurdle.

A joint meeting of US and International standard setters failed to decide on
the objective of hedge accounting when they met in early February.

The standard is the third part of the International Accounting Standards
Board’s review of its fair-value standard known as IAS 39.

The board’s review of hedge accounting is occurring in tandem with attempts
to harmonise its accounting rules with those in the US.

Vincent Papa, director with the Chartered Financial Analyst Institute, would
prefer the IASB take its time, and undertake a thourough revision of the
standard. “Those (original) deadlines were not realistic,” he said. “If they are
doing it in essence with a gun to their head, due to the political environment,
a crisis-orientated environment, for users, that would not be a preferable
outcome.”

Hedge accounting enables companies to smooth out financial volatility.
Changes in currency or markets, amid a range of factors, may create uncertainty
around an item’s expected cash flows or value. Companies can enter into separate
contracts to counter and offset this risk – effectively hedging their bets.

Hedge accounting allows companies to link two, ordinarily separate, contracts
in their financial statements, and reflect this in profits. The objective is to
provide investors with a better picture of a company’s position and financial
performance.

Hedge accounting is, however, sometimes criticised as being restrictive.
Under current rules companies must document the objective and strategy at the
inception of a hedge. They must also judge the effectiveness of the hedge.

The issue brought American bank Fannie Mae unstuck in 2006 when then US
Securities and Exchanges Commission chairman Christopher Cox said the bank
“sought to fit the vast majority of its transactions into a simplified method of
applying hedge accounting”.
Under current rules, if a hedge is not “highly effective”, the transactions are
treated independently and fed through the profit and loss statement.

Many companies do not bother with hedge accounting, either unwilling or
unable to comply with the conditions, but the IASB wants to change this. The
board is attempting to whittle down the rules to a collection of principles.

Proposals were expected by December 2009, but were delayed to March 2010. Now
this date is being seen as optimistic. The IASB say they are committed to a root
and branch revision of the standard.

FANNIE HEDGES ITS BETS

In June 2006 US mortgage lender Fannie Mae reported an $11bn (£7bn) reduction
of previously reported net income due in no small part to its failure to
appropriate comply with hedge accounting rules.

In the US hedge accounting was governed under rule FAS 133, which formed the
basis of the International standard now being revised.

Then U.S. Securities & Exchange Commission chairman Christopher Cox said
Fannie Mae tried to fit a majority of its transactions into its own hedge
accounting system.

Cox said Fannie did not have adequate systems or personnel in place to comply
with FAS 133’s provisions, “in particular, with provisions that require periodic
assessment of effectiveness and measurement of ineffectiveness”.

Fannie Mae agreed to pay $400m at the time.

Further reading:

IASB
Phase III – Hedge accounting

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource