Draft proposes better alignment with economic hedging, but careful analysis still required
TORONTO, Oct. 1, 2012 /CNW/ - KPMG in Canada (KPMG) welcomes the International Accounting Standards Board's (IASB) draft of its forthcoming International Financial Reporting Standards (IFRS) on general hedge accounting, issued September 7, 2012.
The IASB's proposal aligns hedge accounting more closely with risk management in response to stakeholder requests for additional conceptual clarification - a positive step forward for those affected.
Proposal highlights include:
- Remove the rigid 'bright line' for assessing hedge effectiveness, allowing for a more flexible principles-based approach to hedge accounting
- Permit hedge accounting for risk components of non-financial items
- The draft will be available until early December 2012, after which time the IASB intends to proceed to finalize the draft
Some industries (banking and insurance) may believe these proposals will not significantly change the 'status quo' while other industries may be keen to seize the opportunity to further align their hedge accounting with how they actually manage risk.
Airlines, manufacturers, energy and natural resources companies, and those that manage significant commodity price exposures will have the most to gain from the proposals to permit hedge accounting for risk components of non-financial items. A company will be able to reflect in its financial statements an outcome that is more consistent with how management assesses and mitigates risks for key inputs into its core business.
"Of all the principles in the draft, companies will most welcome the relief provided to hedge the component part of a non-financial item, such as the oil in jet fuel in the airline industry or the wheat in flour for the food industry," said Valerie Gillis, Partner, Financial Risk Management, KPMG. "Although the principles will lead to more useful information, the application guidance in some areas remains complex. Significant effort may be needed to analyze the requirements and determine how best to apply them to a company's particular circumstances."
"While some entities may be eager to implement the proposals, they may need to apply a greater degree of judgement to comply with them and additional disclosures will be required to inform users of how an entity is managing its risks," said Todd Buchanan, Partner and National Leader, Accounting Advisory Services, KPMG. "Financial reporting in the mining sector could look different as a result of the proposed change. Assessing the effect of the new requirements will require close collaboration among those in the sector to ensure transition plans are in place ahead of the effective date."
- IASB's draft on forthcoming IFRS on general hedge accounting
- KPMG's Defining Issues, September edition: IASB issues hedge accounting model
- KPMG's In the Headlines, September edition: Hedge accounting moves closer to risk management
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SOURCE: KPMG LLP
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National Manager, Media Relations
KPMG in Canada