IASB prepares to release hedge accounting proposals

THE INTERNATIONAL ACCOUNTING Standards Board (IASB) is on the verge of releasing accounting proposals aimed at illuminating complex risk strategies by large corporations.

It’s hoped new accounting proposals will better show investors how large corporations offset their risks, with one accounting expert commenting: “It is difficult to see there being a loser”.

The rules will particularly help companies which have to routinely hedge the price of complex products with volatile prices which can dramatically affect underlying performance. The airline industry has to hedge the price of jet fuel in order to counteract the natural volatility in fuel prices.

British Airways alone used about six million tones of jet fuel during 2008. Under the new proposals airlines will be able to pluck out the individual components of its hedged products, which for jet fuel, will allow aviation companies to hedge the price of crude oil.

Similarly chocolate manufacturers will be able to hedge the price of cocoa beans, which can fluctuate from year to year and affect underlying performance.

Proposals are expected to remove the bright-line rule which only allows companies to use the rules if they meet strict requirements.

The proposals will likely be welcomed by large corporations which will now be able to show investors how they manage risk in their published accounts.

Andrew Spooner, financial instruments partner with Deloitte, said new proposals would better show how companies manage risk.

“If you did something for risk management purposes, and it totally aligns with what you are doing for risk management purposes, you’d hope that would reflect in your accounts,” he said.

“At the moment there is a certain amount of economic hedging which doesn’t necessarily qualify for hedge accounting… For the ones who couldn’t get hedge accounting because of the current rules they are the ones that have the most to gain.”

Proposals are expected to be released later this week.


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Fiona Westwood of Smith and Williamson.