Prior to the issuance of IFRS 9, hedge accounting has been criticized for being rule-based, complex, not aligned with entities’ risk management strategies, and inconsistent between financial versus nonfinancial items. The IFRS and GAAP frameworks attempt to simplify hedge accounting and allow more strategies to qualify for hedge accounting. The approach taken, however, has been distinct resulting in significant differences between US GAAP and IFRS.
The IASB took a comprehensive approach in revising its guidance from IAS 39 to better reflect risk management activities in the financial statements. In addition, it provides more flexibility in allowing cash instruments to be hedging instruments. IFRS 9 made it easier to qualify for hedge accounting by eliminating the 80-125% effectiveness requirements. It only requires an economic relationship between the hedged item and the hedging instrument that gives rise to offset. Nevertheless, no voluntary de-designation is allowed unless there is a change in the risk management objective, or the expiration or ineligibility of the hedge.
The FASB, on the other hand, has introduced targeted improvement to address specific practice issues (www.fdic.gov>2018). . In comparison, US GAAP maintained more qualifying criteria which include rigorous assessment of effectiveness in many cases. “Highly effective” requires the 80% - 125% offsetting changes in fair value or cash flows attributable to the hedged risk. Unlike IASB, FASB allows voluntary de-designation of a hedging relationship at any time.
Both US GAAP and IFRS require formal designation and documentation of a hedging relationship at the beginning of the relationship.
Hedge accounting is permitted to certain eligible hedging instruments and hedged items. However, the detailed requirements are different. Both permit hedging a component of a nonfinancial item. Nonetheless, more nonfinancial components are qualified as hedged items under IFRS general criteria of being separately identifiable and reliably measurable.
The two Boards require initial and ongoing assessments of effectiveness. However, they differ in the nature and timing of these effectiveness assessments. Though IFRS and GAAP allow non-derivatives to be hedging instruments in certain cases, IFRS generally permits such designation as hedging instruments in more cases than the US GAAP. To improve hedge effectiveness, both permit exclusion of certain components from the assessment of effectiveness. Yet, they differ in the requirement of how to account for that component. Partial-term hedging is permitted by both US GAAP and IFRS, although US GAAP is more prescriptive about the timing of the hedged item.
The effective date of IFRS 9 is January 1, 2018 for a calendar year-end entity. The revised ASC 815 under US GAAP is effective for fiscal year-end public companies beginning after December 15, 2018 Both Boards allow early adoption.
The IASB and FASB have the goal to improve hedge accounting by simplifying the hedging rules and aligning them with entities’ risk management strategies. Nonetheless, their approaches are different and consequently the two Boards’ guidance do not converge. Hence, being bilingual in both sets of standards is increasingly important to participate in the global capital markets. This article only highlights some of the major differences in general hedge accounting.
Reference :
www.pwc.com “IFRS and US GAAP : Similarities and Differences 2018”.
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By.. Orapin Duangploy |
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