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Hedge Accounting

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Cathy Centeno

on 16 January 2014

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Transcript of Hedge Accounting

What is Hedging?
A risk management strategy used in mitigating the impact from uncertainties (fluctuations in the prices of commodities, currencies, or securities)
Potential Consequences of IFRS 9 Implementation
Too much flexibility???
Hedge Accounting
What is hedging?



Looking into the future

IAS 39
Retrieved from Mian (1996) and http://www.businessdictionary.com/definition/hedging.html#ixzz2qOYcB8fU
Hedge Instrument change in fair value offsets the changes of a hedged item
$ 1M sold
$ 1M back
Forward Contract to sell 1M € at a fixed rate
$ 1M
1,2M €
What Hedge Accounting shows
Exposure to risks
Hedging strategy
IFRS (2013). IFRS 9: Financial Instruments (replacement of IAS 39). IFRS Foundation. Retrieved from http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Pages/Financial-Instruments-Replacement-of-IAS-39.aspx

IFRS (2010). Snapshot: Hedge Accounting – Exposure Draft. IFRS Foundation. December
Herz, R. (2013). lASB's Effort to Simplify Hedge Accounting. Compliance Week. March

Mian, S. L. (1996). Evidence on Corporate Hedging Policy. Journal of Financial and Quantitative Analysis Vol. 31, 3, September

Cunico, S., Housa, F. (2013).IFRS 9 Hedge Accounting - the proposals, opportunities and implementation. Charter, November

Panaretou, A., Shackleton, M. B., Taylor P. A. (2013). Corporate Risk Management and Hedge Accounting. Contemporary Accounting Research Vol. 30, 1
Mian (1996), Panaretou (2013) and Herz (2013)
Enhance quality and homogeneity of information
Information asymmetry decreases
Too rule-based

Difficult to apply

Non financial items allowed to be hedged
IFRS (2010), IFRS (2013) and Hertz (2013)
Not a clear representation of risk management practices
Applied only to "qualified transactions" that are "highly effective" in achieving the intended risk management results

Documentation on risk management objective

Loss or gains on hedging instrument recognized when hedged item is recorded in financial statements

Reporting at fair value

Only financial items to be hedged
Improvements and Simplification of IAS 39
Principle-based criteria applied now:
"economic relationship" exists

Non financial items now considered

Net positions hedged accepted
Application of IFRS 9
January 2015
When IFRS 9 is completed
IFRS (2013)
Cunico and Housa (2013) and Herz (2013)
Looking into the future....
Reduces quality, consistency and comparability of financial reports
Herz (2013)
Closer alignment with corporate risk management activities
Full transcript