IFRS 9 Hedge Accounting: Missed Deadlines Creates Uncertainty

The keenly anticipated issuance of the new accounting standard on hedge accounting (Phase III of IFRS 9) has been delayed from June 2011 until sometime in Q3 2011, probably September. This is disappointing news for many; particularly the commodity and option hedgers who were hoping to take advantage of the more favourable provisions in the new standard as soon as possible. I know of some companies that had even documented their option hedges in accordance with IFRS 9 with the hope of applying hedge accounting for the financial period to June 2011 – this will no longer be possible.

Why the delay?

First, I think the IASB were surprised at some of the negative feedback on certain areas of the standard during the comment letter review process, particularly since they had done so much outreach prior to issuing the standard. Since the comment letter deadline, they already made tentative decisions to accommodate some of the feedback in the eventual standard. For instance, zero cost collar option structures will now be treated consistent with premium-paid options under the standard. Also, the proposed new fair value hedging mechanics have been removed to keep the same approach used currently under IAS 39. Furthermore, in a tight decision by the IASB, it looks like they will allow hedge accounting to be applied to risks that impact fair value through OCI as well as P&L.

Secondly, some key stakeholders have begun to react to the fact that the IASB and FASB have taken considerably different paths in their hedge accounting proposals as well as financial instruments accounting in general. Regulators such as the Securities and Exchange Commission (SEC) in the US are very concerned that the two Boards seem so misaligned on this topic when operating under a framework of convergence. Recently, both the IASB and FASB issued a press release stating the convergence would not be completed by June 2011 as initially indicated but more towards the end of the year. However, even that timeline looks ambitious when you compare the two hedge accounting proposals currently on the table, and there will need to be some key concessions on both sides to issue a joint standard.

Macro hedging also delayed

Another indicator of the challenges faced by the IASB has been the delay of the exposure draft on macro hedge accounting. This is the process of hedge accounting most often employed by banks when hedging the interest rate risk between deposits and loan assets. European banks in particular have been very critical of the current guidance under IAS 39 so the IASB has been trying to form a more practical, acceptable solution with this project. An exposure draft was due out in June 2011 but has now been pushed to the second half of 2011, and many predict this would be more likely December 2011, making it six months behind schedule. This is reflective of the complexity of the issues around macro hedge accounting and the strong vested interest of the banking lobby in getting a viable solution. In addition, the IASB must decide on its general hedge accounting model first before releasing a macro hedging framework, so the delays highlighted above have a waterfall effect on this project.

Sir David Tweedie ends his tenure as IASB Chairman in June 2011. One of his main priorities was to replace IAS 39 with IFRS 9. Sadly for him, this goal will remain unfulfilled by the end of his term. Sad for you too if you hedge commodity risk or use option derivatives. Let’s hope the new chairman, Hans Hoogervorst, has the same drive to keep the momentum in place for a better hedge accounting standard.