24 July 2013

EFRAG: Feedback statement on the Review Draft IFRS 9

On 18 January 2013, EFRAG issued its letter to the IASB commenting on the IFRS 9 Hedge Accounting Review Draft. EFRAG's comments reflected the results of the field test carried out by EFRAG in partnership with the ANC, ASCG, FRC and OIC. The letter provided an overview of the implementation difficulties, including fatal flaws and requests for additional guidance. In addition, it provided input to the IASB's effect analysis.

As part of the findings of the field test, many constituents reported that it was unclear to them whether the requirements in the Review Draft would change the way they dealt with macro hedge relationships. In order to address these concerns, EFRAG organised further outreach. The results of these outreach activities were assessed together with the text of the Review Draft.

On 22 March 2013, EFRAG published its request to the IASB regarding macro hedging practices, which analysed the impact on current macro hedging practices of the transition between IAS 39 and the Review Draft and the consequences of the IASB's separation of its project on macro hedging for open portfolios from the general hedge accounting requirements.

This feedback statement summarises the work performed by EFRAG regarding:

• The field test of the Review Draft; and
• The consultation on macro hedging practices.

Furthermore, it explains how the input received in the field test and the comment letters received were considered by the EFRAG Technical Expert Group (EFRAG TEG) during its technical discussions, and, where applicable, the justification for EFRAG’s final position.

The constituents in the field test confirmed that the Review Draft introduces important improvements in the hedge accounting requirements such as:

1. improvements in the hedge effectiveness testing requirements;
2. the treatment of the time value of options and the treatment of forward points;
3. the possibility to designate aggregated exposures as eligible hedged item;
4. the ability to designate risk components as eligible hedged item; and
5. the ability to rebalance hedge relationships.

Constituents identified the following fatal flaws:

1. Aggregated exposures and net positions: Paragraph 6.6.6 of the Review Draft relating to net position used 'risk' in the singular while paragraph B6.3.3 of the Review Draft relating to aggregating exposures referred to 'risks' in plural. Constituents believed that the IASB should clarify in the final standard that a net position could consist of several risks that on a net basis add up to a nil position.

2. Hedge ratio and effectiveness: Paragraph 6.4.1 (c) (iii) of the Review Draft defining the hedge ratio assumed that there was always a clearly identified direct relationship between hedged items and hedging instruments. However for banks and energy companies that manage high volumes of financial instruments this was deemed very difficult to achieve. Additionally, the interaction between the hedge ratio and its potential rebalancing was not clear to constituents (paragraphs 6.4.1 (c) (iii) and 6.5.5 of the Review Draft).

3. Open and closed portfolios: Some constituents questioned whether reference in the Review Draft to a group of items (as a hedged item) was meant as a reference to a closed portfolio or not. They noted that paragraph 6.6.6. of the Review Draft which stated that 'the hedged net position changes in size over the life of the rolling net risk hedging strategy and the entity', was more akin to an open portfolio. One constituent raised several application issues with regard to the use of open portfolios under the Review Draft. Additional guidance was requested to the IASB by constituents.

4. Macro-hedging: constituents were concerned whether the exception in paragraphs 81A, 89A and AG114-AG132 of IAS 39 would continue to apply under the requirements of the Review Draft. Also, it was not clear to them whether all other hedge requirements of IAS 39 would also continue to apply to these hedges. Additionally, it was unclear whether the Review Draft permitted hedge accounting strategies described in Section F of the Implementation Guidance of IAS 39. Finally, it was questioned whether macro cash flow hedges were to be addressed in the macro hedging project of the IASB.

Other inputs received during the field test included various detailed implementation issues. Some constituents reported implementation difficulties on the treatment of basis risk in cross currency interest rate swaps; the accounting treatment for time value of options and forward elements for forward contracts and the own use exception. Constituents pointed out areas where the Review Draft did not allow accounting for some hedging strategies such as hedging credit risk or using sub-LIBOR hedges. Constituents also noted that hedges of foreign currency risk were to be accounted differently from hedges of commodities. Additionally, constituents were concerned about the commercial sensitivity of some of the information that would need to be disclosed.

Press release

Feedback to constituents

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