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EFRAG commends the IASB’s efforts in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance, having regard for the significant practical difficulties entailed.
The Discussion Paper proposes a Portfolio Revaluation Approach for all an entity’s risk exposures that are dynamically risk managed. In the draft comment letter EFRAG does not support this approach and calls for a return to the original aim of the project: the development of a hedge accounting solution for open portfolios.
A hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. Unlike the proposed scope of the Discussion Paper, a hedge accounting solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments.
Although the Discussion Paper makes welcome progress in understanding dynamic risk management processes in banks and identifying the elements of a solution that is compatible with risk management practices, EFRAG believes that further development work and field testing will be necessary before an Exposure Draft could be published.
Responses to the draft comment letter are requested by 10 October 2014. Given the complex nature of the Discussion Paper, EFRAG raises an unusual number of questions to constituents. To ease gathering input and responses, EFRAG would welcome discussions with constituents in advance of formal responses, particularly to explore the operationality of some of the identified proposals.