02 April 2013

Deloitte commented on novation of derivatives and continuation of hedge accounting

Deloitte welcomes the IASB’s initiative in addressing this emerging issue and agrees that an amendment to IAS 39 and to IFRS 9 is necessary to address the effects on hedge accounting relationships of regulations in major capital markets including the US and the EU and, potentially, future regulations elsewhere leading to novation of derivatives to a central clearing function.

Deloitte does not, however, agree that the scope of the amendment should be limited to novations required by such regulations as that would not capture the many novations that are likely to be heavily encouraged or incentivised by governments or regulators without being formally required. Deloitte does not believe that entities that novate contracts in anticipation of such legislation becoming effective should be disadvantaged. In Deloitte's view, the absence of a legislative tool requiring novation should not alter the Board’s conclusion that a novation of a derivative to a central clearing function should not be treated as a discontinuation of hedge accounting. More broadly, Deloitte believes it would be premature to state that these are the only circumstances in which novation would not lead to discontinuance of a hedge relationship without a full assessment of the conceptual merits of requiring, or not requiring, discontinuance in a range of novation scenarios.

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