Generación de Instancias

nonfinancial items

In the context of a cash flow hedge, IFRS permits more flexibility regarding the presentation of amounts that have accumulated in equity (resulting from a cash flow hedge of nonfinancial assets and liabilities).

Therefore, the balance sheet impacts may be different depending on the policy elec- tion made by entities for IFRS purposes. The income statement impact, however, is the same regardless of this policy election.

In the context of a cash flow hedge, US GAAP does not permit basis adjust- ments. That is, under US GAAP, an entity is not permitted to adjust the initial carrying amount of the hedged item by the cumulative amount of the hedging instruments’ fair value changes that were recorded in equity.

US GAAP does refer to “basis adjustments” in a different context wherein the term is used to refer to the method by which, in a fair value hedge, the hedged item is adjusted for changes in its fair value attributable to the hedged risk.

Under IFRS, “basis adjustment”

commonly refers to an adjustment of the initial carrying value of a nonfinancial asset or nonfinancial liability that resulted from a forecasted transaction subject to a cash flow hedge. That is, the initial carrying amount of the nonfinancial item recognized on the balance sheet (i.e., the basis of the hedged item) is adjusted by the cumulative amount of the hedging instrument’s fair value changes that were recorded in equity.

IFRS gives entities an accounting policy choice to either basis adjust the hedged item (if it is a nonfinancial item) or release amounts to profit or loss as the hedged item affects earnings.

Technical references

IFRS IAS 39, IFRS 7, IFRIC 9, IFRIC 16

FASB Proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities

The FASB and IASB are jointly reconsidering the accounting for financial instruments, including hedge accounting. Among other things, the boards expect the project to result in simplification of the accounting requirements for hedging activities, resolve hedge accounting practice issues that have arisen under the current guidance, and make the hedge accounting model and associated disclosures more useful and understandable to financial statement users.

In this regard, on May 26, 2010, the FASB issued its exposure draft on financial instruments. Comments were due by September 30, 2010. The FASB proposes to carry forward many of its ideas contained in the 2008 exposure draft on hedge accounting. However, in contrast with the 2008 exposure draft, the FASB proposes to continue with the bifurcation-by-risk approach as contained in Topic 815 for financial instruments classified at fair value with changes in fair value recognized in other comprehensive income (OCI). The 2010 exposure draft:

• Lowers the threshold to qualify for hedge accounting. The hedging relationship must be “reasonably effective” instead of “highly effective.” A company would need to demonstrate and document at inception that (1) an economic relationship exists between the derivative and the hedged item, and (2) the changes in fair value of the hedging instrument would be reasonably effective in offsetting changes in the hedged item’s fair value or variability in cash flows of the hedged transaction. While this assess- ment would need to be performed only qualitatively, the proposal notes that a quantitative assessment might be necessary in certain situations.

• Replaces the current requirement to quantitatively assess hedge effectiveness each quarter with a qualitative assessment at inception and limited reassessments in subsequent periods. The proposal also would eliminate the shortcut and critical-terms match method. Under the proposal, a subsequent hedge effectiveness assessment would be required only if circumstances suggest that the hedging relationship may no longer be effective. Companies would need to remain alert for circumstances that indicate that their hedging relationships are no longer effective. Under current guidance, it is not unusual for companies to determine that a hedging relationship is highly effective in one period but not highly effective in the next period. In those circumstances, companies are unable to consistently apply hedge accounting from period to period. The board believes that by lowering the effectiveness threshold to reasonably effective, the frequency of these occurrences should diminish.

• Prohibits the discretionary de-designation of hedging relationships. The proposed model no longer would allow an entity to discontinue fair value or cash flow hedge accounting by simply revoking the designation. A company would only be able to discontinue hedge accounting by entering into an offsetting derivative instrument or by selling, exercising, or terminating the derivative instrument. As a result, once a company elects to apply hedge accounting, it would be required to keep the hedge relationship in place throughout its term, unless the required criteria for hedge accounting no longer are met (e.g., the hedge is no longer reasonably effective) or the hedging instrument is sold, expired, exercised, or terminated.

• Requires recognition of the ineffectiveness associated with both over- and under-hedges for all cash flow hedging relationships (i.e., the accumulated OCI balance should represent a “perfect” hedge). This represents a significant change since under current US GAAP, only the effect of over-hedging is recorded as ineffectiveness during the term of the hedge.

• The FASB’s proposal will simplify certain key aspects of hedge accounting that many companies have found challenging. However, it also will limit or eliminate other aspects of the current model that some companies found beneficial. The proposed hedge accounting has the potential to create significant differences when compared with that proposed by IFRS. Despite the overall difference in approach to the project, the FASB and IASB have been jointly discussing hedge accounting.

ments classification and measurement project.

IASB draft of forthcoming new hedge accounting requirements

In September 2012, the IASB posted to its website a draft of the forthcoming general hedge accounting requirements that will be added to IFRS 9 Financial Instruments. The draft proposes changes to the general hedge accounting model and is expected to be finalized by the end of 2012.

The macro hedge accounting principles will be addressed as a separate project. In May 2012, the IASB tentatively decided to move toward a discussion paper (instead of an exposure draft) as the next due process step relating to macro hedge accounting, which is expected to be released by the end of 2012.

The proposed IFRS model is more principle-based than the current IASB and US GAAP models and the US GAAP proposal, and aims to simplify hedge accounting. It would also align hedge accounting more closely with the risk management activities undertaken by companies and provide decision-useful information regarding an entity’s risk management strategies.

The following key changes to the IAS 39 general hedge accounting model are proposed by the IASB draft:

• Replacement of the “highly” effective threshold as the qualifying criteria for hedging. Instead, an entity’s designation of the hedging relationship should be based on the economic relationship between the hedged item and the hedging instrument, which gives rise to offset. An entity should not designate a hedging relationship such that it reflects an imbalance between the weight- ings of the hedged item and hedging instrument that would create hedge ineffectiveness (irrespective of whether recognized or not) in order to achieve an accounting outcome that is inconsistent with the purpose of hedge accounting. The objective of the IASB is to allow greater flexibility in qualifying for hedge accounting but also to ensure that entities do not systematically under- hedge to avoid recording any ineffectiveness.

• Ability to designate risk components of non-financial items as hedged items. The IASB’s draft would permit entities to hedge risk components for non-financial items, provided such components are separately identifiable and reliably measurable.

• More flexibility in hedging groups of dissimilar items (including net exposure). The IASB’s draft would allow hedges of (1) groups of similar items without a requirement that the fair-value change for each individual item be proportional to the overall group (e.g., hedging a portfolio of S&P 500 shares with an S&P 500 future) as well as (2) groups of offsetting exposures (e.g., exposures resulting from forecast sale and purchase transactions). Additional qualifying criteria would be required for such hedges of offsetting exposures.

• Accounting for the time value component as “cost” of buying the protection when hedging with options in both fair value and cash flow hedges. The IASB’s draft introduces significant changes to the guidance related to the accounting for the time value of options. It analogizes the time value to an insurance premium. Hence, the time value would be recorded as an asset on day one and then released to net income based on the type of item the option hedges. The same accounting should apply for forward points in a forward contract.