EFRAG published its final comment letter on the IASB's ED Novation of Derivatives and Continuation of Hedge Accounting (Proposed Amendments to IAS 39 and IFRS 9).
On 28 February 2013, the IASB published an ED of proposed amendments to IAS 39 and corresponding amendments in the forthcoming hedge accounting chapter in IFRS 9 to provide an exception to the requirement for the discontinuation of hedge accounting when a hedging instrument is required to be novated to a central counterparty as a result of laws or regulations.
EFRAG welcomes the IASB’s responsiveness in providing relief from having to discontinue hedge accounting when entities novate hedging instruments to central counterparties. However, EFRAG believes the proposed amendments are too restrictive as many novations that take place in response to laws or regulations (for example in the cases when legislation or implementing regulation would require only certain existing OTC derivatives to be cleared through central counterparties or when entities have already started to novate OTC derivatives before they are legally required to do so) would not qualify for the relief. For those reasons, EFRAG believes 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 believes 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 also notes that diversity in practice exists regarding the interpretation of the derecognition requirements as applied to novations, namely that certain novations do not lead to derecognition. Without expressing a view on whether this is an appropriate interpretation, EFRAG notes that the wording of the Exposure Draft would prohibit such interpretation. Therefore, rather than requiring retrospective application, EFRAG believes the IASB should include an effective date with early application permitted and only require prospective application.
Press release
Final comment letter
© EFRAG - European Financial Reporting Advisory Group
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