FEE has commented on EFRAG's draft letter about IASB's Discussion Paper: Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to macro hedging.
In the Federation of European Accountants' (FEE) opinion, it is essential that the International Accounting Standards Board (IASB) reaches an agreement on the key principles underpinning, and the approaches to, dynamic hedging prior to solving some of the detailed questions raised in the Discussion Paper.
Therefore FEE has focused its response on the principle issues and left some of the detailed queries open as FEE believes there is an order to be followed in the development of solutions for a suitable financial reporting model for reflection of the modern risk mitigation approaches. FEE will consider its position on the details in the next DP or ED phases of this project.
FEE is convinced the Board is focusing on the key issues and believes that the model proposed, once limited to risk mitigation, is the right one. However, FEE is conscious of the conceptual and practical challenges, which relate mainly to pipeline transactions, equity model book and behaviouralisation (as addressed in the FEE response to question 4 of the IASB DP) that could be difficult to overcome.
Should the Board conclude these challenges are unsurmountable, FEE recommends the IASB revisits the existing IAS 39 approach to portfolio interest rate management with a view to simplifying its application and to extend its use to capture the foreign exchange and commodity risks.
In FEE's view, the proposed model, once the conceptual and practical challenges are overcome, would likely provide a clear solution to the issues which caused the existing “EU carve out” to the IAS 39 requirements.
FEE would also like to stress that in order to find a comprehensive and practical solution to the accounting reflection of the existing risk mitigation practices, the IASB would need to amend or modify some of the current principles of asset and liability recognition and measurement. FEE points out that such reflection would be useful for these specific circumstances but should remain limited to portfolios exposed to the managed financial risks rather than extended to other items or conceptual framework approaches.
FEE's full comment letter
EFRAG's draft comment letter
IASB's DP
© FEE
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