23 May 2013

EFRAG’s feedback statement on 'Novation of Derivatives and Continuation of Hedge Accounting – Proposed amendments to IAS 39 and IFRS 9'

EFRAG published its feedback statement for its final comment letter on the ED, 'Novation of Derivatives and Continuation of Hedge Accounting – Proposed amendments to IAS 39 and IFRS 9'.

EFRAG published its final comment letter on the ED '2013/2 Novation of Derivatives and Continuation of Hedge Accounting – Proposed amendments to IAS 39 and IFRS 9' (‘the ED’) on 11 April, 2013. The feedback statement summarises the comments received on EFRAG Draft Comment Letter and explains how those comments were considered by the EFRAG Technical Expert Group (EFRAG TEG) during its technical discussions.

In its final comment letter, EFRAG welcomed the IASB’s responsiveness in providing relief from having to discontinue hedge accounting when entities novate hedging instruments to central counterparties.

Based on the comments received, EFRAG understands that many entities have already started to voluntarily novate their derivatives ahead of the legislation or laws and therefore agreed that such novation should not be scoped out as they are done with the same economic incentive.

EFRAG agrees that scoping out novations to central counterparties that are done on a voluntary basis may disincentivise companies from novation to central counterparties. In most cases novation to central counterparties have increased hedge effectiveness and the economic reasons for doing so are the same as when they are required by law or regulation. For those reasons, EFRAG believed the IASB should remove the condition that the novation is required by laws or regulations as this condition unnecessarily restricts the scope of the relief.

EFRAG agreed with constituents’ views that all voluntary novations with a central counterparty should be included in the relief, because the economic impact of a novation to a central counterparty is the same, regardless whether the novation is required by law, done in anticipation of a legal requirement, done to obtain regulatory relief or done on a purely voluntary basis.

EFRAG noted that diversity in practice exists regarding the interpretation of the derecognition requirements as applied to novations. The comments received confirmed that some constituents have historically interpreted that certain novations should not lead to derecognition such as novations to a different legal entity within the same group. Without expressing a view on whether this is an appropriate interpretation, EFRAG noted that the wording ‘if and only if’ in paragraphs 91(a) and 101(a) of the ED would prohibit such interpretation.

Therefore, EFRAG believed the IASB should include an effective date (with early application permitted) and only require prospective application.

The issue of adding disclosures had been discussed by EFRAG TEG previously and the constituent’s letters had not provided new arguments that had not been considered previously. For those reasons, EFRAG agreed that no specific disclosures are necessary, as IFRS currently does not require disclosures of other ongoing hedge relationships.

In addition, EFRAG noted that requiring one-off disclosures about mandatory novations would potentially be costly and offer little or no benefit to users of financial statements.

Press release

Feedback statement

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