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Many financial institutions and other entities manage risks, such as interest rate risk, dynamically on a portfolio basis rather than on an individual contract basis. Dynamic risk management is a continuous process because the risks that such entities face evolve over time, as does their approach to managing those risks. However, the existing accounting requirements of IAS 39 Financial Instruments are generally considered to be difficult to apply when accounting for such transactions.
As part of its comprehensive response to the global financial crisis, the IASB is replacing IAS 39 with an entirely new financial instruments accounting Standard, known as IFRS 9 Financial Instruments. That project is in the final stages of completion. However, the IASB decided to treat as a separate project the macro hedging component of these reforms in order to elicit views from a broader range of constituents. The Discussion Paper published today represents the first stage in this project, by seeking public comment on a possible approach to accounting for an entity’s dynamic risk management activities, the portfolio revaluation approach (PRA). Under the PRA:
The PRA also addresses the needs of users by providing a more comprehensive set of disclosures concerning an entity’s dynamic risk management activities.