IASB is seeking feedback on accounting for macro hedging. This might be a well known concept for banks, but there is a question about whether anyone else would be interested.

The IASB has taken the first step in the final phase of the project to replace the financial instruments guidance in IFRS. They published their discussion paper (DP) on Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging.

Macro hedging has been treated as a separate project from IFRS 9. Why? The IASB wants to give this project separate treatment in order to gather views from a wider range of constituents. But will it achieve this objective?

What does the DP say?

The DP explores the use of a 'portfolio revaluation approach' (PRA). The PRA is not a full fair value approach; it identifies the risk being managed in an open portfolio and revalues the exposure to that risk based on a present value technique (the 'revaluation adjustment'). The PRA does not require a one-to-one matching of the hedged item and the hedging instrument. This will reduce operational complexities as compared to the current hedge accounting requirements in IAS 39 and IFRS 9.

A conceptual challenge introduced by the PRA is the inclusion of behavioural features, rather than just contractual features. For example, demand deposits (when assessed individually) are repayable on demand. However, when assessed on a portfolio level, core demand deposits are considered by financial institutions as long term fixed rate time deposits for the purposes of dynamic risk management.

The revaluation adjustments of the managed exposures and the fair value changes of the associated hedging instruments are accounted for in profit or loss. The DP suggests alternatives for the presentation of the revaluation adjustments in the statement of financial position and the statement of comprehensive income.

The DP asks a number of questions, mainly on whether the approach is operational, how the proposed approach could be applied to other risks (such as foreign exchange or commodity price risk) and whether it would enhance the usefulness of the information provided by the financial statements.

Who is affected?

All entities that use dynamic risk management strategies for open portfolios will be affected. The outcome of this project will replace the current fair value hedge accounting of interest rate risk in IAS 39.

The DP is likely to be of particular interest to financial institutions, but it might also be of interest to entities in industries such as mining, utilities or manufacturing. That said, the IASB might struggle to get a response to their proposals from nonfinancial institutions.

Why? Firstly, the DP is focused on banks. The PRA is illustrated using an example commonly applied by banks. Is this not a contradiction to the DP's objective? If the goal is to gather the views of the nonfinancial services sectors, why did they not include an example of the non-financial services world?

Secondly, use of general hedge accounting under IAS 39 has been noticeably low outside the financial services sector. IAS 39 is seen as too restrictive and too complicated. IFRS 9's general hedging model released in November 2013 has given hedging a new lease on life – it is simpler and easier to apply. It might be that nonfinancial institutions will focus on implementation of this model before exploring the relatively unchartered territory of macro hedging.

What is next?

The IASB's aim to get a wide range of feedback is appropriate - the non-financial world should get engaged. The deadline for comment is 17 October 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.