31 October 2014

EFRAG’s final comment letter on accounting for dynamic risk management

EFRAG has published its final comment letter on the IASB Discussion Paper Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging.

In its comment letter EFRAG commends the IASB’s effort in comprehensively analysing banks’ dynamic risk management of interest rate risk and developing new thinking on how to best reflect the effects of such practices on a bank’s financial position and performance, having regard to practical difficulties.

EFRAG´s outreach showed that in addition to banks, other companies (e.g. insurance and utility) are also interested in the development of a macro hedge accounting solution covering different types of risks. EFRAG acknowledges the needs of these companies as important and asks the IASB to undertake further analysis with other industries before concluding whether it is possible to develop a one-size-fits-all solution or whether ‘a family’ of models is required to address these different needs.

Although EFRAG encourages the IASB to continue its work on a macro hedge accounting model, EFRAG believes that it is necessary to finalise the Insurance Contracts project before it is possible to assess how any macro hedge accounting solution could apply to the insurance industry.

EFRAG disagrees with the Discussion Paper’s proposed scope focussed on dynamic risk management as EFRAG does not believe it results in decision-useful information. A scope based on risk-mitigation through hedging would in EFRAG´s view hold more promise. EFRAG urges the IASB to continue developing a hedge accounting solution in accordance with the original objective, which is to address the accounting mismatch caused by fair valuing hedging derivatives and measuring hedged items at amortised cost.

Furthermore, EFRAG believes that a macro hedge accounting model should remain consistent with IFRS 9 Financial Instruments and asks the IASB to investigate whether IFRS 9 should be the starting point of the future macro hedge accounting model.

Also, EFRAG believes that a cash flow hedge accounting model should be considered as part of further work as many banks do not manage their interest rate risk on a valuation basis but rather on a cash flow basis. Doing so, EFRAG asks the IASB to reconsider the possibilities of removing the accounting volatility in equity that the present model causes.

Press release

Final comment letter

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