KPMG’sCFO KPMG s CFO Financial Forum and IFRS Institute ...

International Standards Group

© 2012 KPMG IFRG Limited, a U.K. registered company limited by guarantee. All rights reserved. Internal use only.

1

KPMG’s CFO

Click to edit Master title style

KPMG s CFO Financial Forum and IFRS Institute Webcast

Click to edit Master subtitle style

IASB Issues Hedge Accounting Model

September 19, 2012

Enrique Tejerina, partner, KPMG LLP

Mike Gaiso, senior manager, KPMG LLP

Department of Professional Practice

Click to edit Master text styles



2

Administrative

■ CPE regulations require online participants to take part in online questions. Participants are required to respond to a minimum of four q p q pquestions in order to be eligible for CPE credit.

■ Results will be reviewed in aggregate and may be published as a “pulse survey” of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization.

■ Send questions via the “Ask a Question” button■ Send questions via the Ask a Question button.

■ Help Desk: 1-877-398-1471 or outside the United States at1-954-969-3342.

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 112654

1



3

Overview of IASB hedge accounting review draft

Current hedge accounting model considered complex, not reflective of risk management and excessively rules basedof risk management, and excessively rules based,

resulting in arbitrary outcomes

Review draft attempts to:

Align hedge accounting more closely with risk management

Take a more principle-based approach to hedge accounting


2

Address inconsistencies and weaknesses in the existing model



4

Overview of significant changes

Aligns hedge accounting more closely with risk management

■ Fair value option (FVO) for certain own-use contracts

■ FVO for certain credit exposures managed for credit risk using credit derivatives as a substitute for hedge accounting

Cash instruments may be hedging instruments in additional circumstances

Additional exposures may be hedged items:

■ Risk components of non-financial items and non-contractually specified inflation

N t iti d l t f it


3

■ Net positions and layer components of items

■ Aggregated exposure

■ Equity investments at fair value through OCI (Other Comprehensive Income)



5

Overview of significant changes (continued)

Effectiveness assessment:

■ Qualitative test replaces arbitrary bright lines■ Qualitative test replaces arbitrary bright lines

■ Forward looking only

Hedging relationships may require rebalancing without terminatinghedge accounting

Voluntary termination of hedging relationships prohibited

Time value of purchased options and forward element of forward contracts may be deferred or amortized


4

Additional disclosure requirements regarding an entity’s risk management and hedging activities



6

Objective and scope

Objective of hedge accounting

To represent in the financial statements the effect of risk management activities when financial instruments are used to manage risk

Objective of hedge accounting

activities when financial instruments are used to manage risk exposures arising from particular risks that could affect Profit or Loss

(or Other Comprehensive Income [OCI] in limited circumstances)


5

Scope excludes macro hedging



7

Own use contracts

NoCan the contract be settled net in cash or

another financial instrument, or by Executorycontract

Yes

Y

No

exchanging financial instruments?contract

Was the contract entered into and does it continue to be held for the entity's expected

purchase, sale or use?Derivative

Yes

Would FVTPL accounting eliminate or significantly reduce an accounting mismatch

that would otherwise occur?

Has the entity elected FVO?

Yes

No

No


6

Has the entity elected FVO?

Yes

FVTPL



8

FVO for certain credit exposures managed for credit risk using credit derivatives

FVO as a substitute for hedge accounting

Matching name and seniority

Elected at initial All or part of

recognition or subsequently

Revocable

Recognized (e.g., a loan) or unrecognized (e.g., a loan commitment)

All or part ofcredit exposure


7

Difference reported in profit or loss



9

Polling question # 1

With respect to the financial instruments project, the Boards will:

A Issue fully converged standards by June 2013A. Issue fully converged standards by June 2013

B. Issue fully converged standards but not until later than 2013

C. Not achieve their goal of issuing converged standards in theforeseeable future


8



10

Cash hedging instruments

Qualifying non-derivative hedging instruments:

■ FVTPL financial instruments except for:■ FVTPL financial instruments except for:

– FVO liability with fair value changes due to credit risk in OCI

– Financial asset or liability designated as FVO to reduce/eliminate an accounting mismatch if designation as a hedging instrument would recreate the mismatch

■ For hedges other than foreign currency, the entire or proportion of a financial instrument must be designated


9

Prohibition on designating internal instruments retained



11

Additional exposures may be hedged items

■ Specifically identifiable and reliably measurable risk components

Risk components of non financial items– Risk components of non-financial items

■ Groups of items (including net positions)

■ Aggregated exposures

■ FVTOCI investments


10

Prohibition on designating internal instruments retained



12

Assessing risk

Hedged items – Risk components of non-financial items

Same criteria for financial and non-financial risk components

Assessing risk components for eligibility performed in the context of the particular

market Contractual vs

Separately identifiable

Reliably measurable

market structure to

which the risk relates and in

which the hedging

Contractual vs. non-contractual


11

identifiable measurableactivity

takes place



13

Evaluating whether a risk is separately identifiable

Is there a contract? Is the risk t l

No

Does the contract specify how the risk

is priced into

Yes

separately considered in

pricing the hedged item

based on externally

Risk not separately identifiable

(not permitted hedged risk)

No

No

is priced intothe contract?

Yes

Risk is separately identifiable (permitted hedged

Yes

yavailable

information?

hedged risk)


12

risk if also ‘reliably measurable’)



14

Evaluating whether a risk is reliably measurable

Are the inputs to measuring the

effect of the risk observable based

on externally

Are the unobservable

inputs insignificant to the

Risk not reliably measurable

(not permitted

No No

on externally available

information?

insignificant to the measurement? hedged risk)

Yes Yes


13

Risk is reliably measurable(permitted hedged risk)



15


I understand the current IFRS hedge accounting rules:

A Well or very wellA. Well or very well

B. In general, but not in detail

C. Very little or not at all


14



16

Hedged items – Groups

Eligibility criteria of a group of items (including net positions) as the hedged item

■ Consists of (components of) items that would individually be eligible hedged items

■ Items in the group are managed on a group basis for risk management purposes

■ For a cash flow hedge of a group of items whose variability in cash flows are not expected to be approximately proportional to the overall variability in cash flows so that an offsetting risk position arises:

– Hedged risk must be FX risk, and

D i ti t if h th f t t ti t d t ff t P&L– Designation must specify when the forecast transactions are expected to affect P&L as well as their nature and volume

For a net position to be eligible for hedge accounting, all of the individual items comprising the net position must be designated. For example, if an entity has a group of firm sale commitments in 9 months’ time for 100 FC and a group of firm purchase commitments in 18 months’ time for 120 FC it could not achieve hedge accounting by


15

commitments in 18 months time for 120 FC, it could not achieve hedge accounting by designating a net position amount of 20 FC. Instead, it would have to designate a gross amount of purchases and a gross amount of sales that together comprisethe net position.



17

Hedged items – Groups (continued)

Requirements for designating a component of a nominalamount in a groupg p

■ Designating a percentage or layer component of an eligible group of items must be consistent with the entity’s risk management objective

■ For a layer component of a group of items:

– Layer must be separately identifiable and reliably measurable

– All items in the group would have to be exposed to thesame hedged risk

– Entity can identify and track the group of items

– Change in fair value of the hedged layer in a fair value hedge must consider the effect of any prepayment options of the individual items


16

consider the effect of any prepayment options of the individual items that comprise the group



18


I believe that the current hedge accounting requirements under both U.S. GAAP and IFRS:

A. Are unnecessarily complex under both U.S. GAAP and IFRS

B. Reflect the complexity of the subject and are therefore necessary to ensure comparability of reporting


17



19

Hedged items – Aggregated exposures

Aggregated exposure = non-derivative exposure + derivative

Effectiveness Assessment

Derivative

Nonderivative exposure

Effectiveness assessment and ineffectiveness measurement

Ineffectiveness Measurement

Derivative hedging

instrumentDerivative

vs.


18

If aggregate exposure is a hedging relationship, assessment and measurement would be performed at that level



20

Hedged items – Aggregated exposures (continued)

Example of an aggregated exposure:

Hedged itemAggregated exposure

10-year variable rate debt indomestic currency

10-year fixed rate debt in a foreign currency

+

10-year fixed tovariable CCIRS

Hedging instrument5-year domestic variable to fixed IRS

variable CCIRS


19

An aggregated exposure may or may not be a hedging relationship depending on risk management



21

Accounting for qualifying hedges – FVTOCI investments

FVTOCI hedged item – changes in fair value in OCI

Hedging instrument – changes in fair value in OCI

g g

Ineffectiveness in OCI


20

Amounts never reclassified from AOCI to profit or loss



22

Hedge effectiveness assessment

1) Economic relationship between the hedged item and hedginginstrument must exist

2) Credit risk does not dominate the value changes that result from the economic relationship

3) Hedge ratio used for hedge accounting must equal that actually used for risk management

H d ti t t b i t ti ll i ht d t t h d– Hedge ratio must not be intentionally weighted to create hedge ineffectiveness to achieve an accounting outcome inconsistent with the purpose of hedge accounting


21

Although not explicit in Review Draft, link between hedging relationships and risk management objectives will need to be established.



23

Hedge effectiveness assessment (continued)

Qualitative or quantitative?

■ At the inception of the hedge relationship and

Must capture the relevant characteristics of the hedge relationship includingsources of hedge ineffectiveness

■ At the inception of the hedge relationship and

■ On an ongoing basis at least upon:

– Each reporting date, or

– A significant change in the circumstances affecting the hedge effectiveness requirements

sources of hedge ineffectiveness

Qualitative or quantitative?

■ Depends on facts and circumstances

■ Derivative in or out of the money is not determinative

■ Qualitative assessment may be appropriate if critical terms of hedging instrument and hedged item match l l li


22

or closely align

■ An entity’s risk management is the main source of information to perform the effectiveness assessment

■ May need to change methods if relevant characteristics or sources of ineffectiveness change



24


I believe that the IASB hedge accounting exposure draft will:

A Affect the FASB’s deliberation process for its hedge accountingA. Affect the FASB s deliberation process for its hedge accounting exposure draft and ultimately affect U.S. GAAP

B. Be ignored by the FASB

C. Be withdrawn by the IASB


23



25

Rebalancing and discontinuation of hedge accounting

■ Rebalancing – Adjustments to the quantities of the hedged item and/or hedging instrument to maintain a hedge ratio that complies with the g g g phedge effectiveness requirements

■ Rebalancing allows hedge accounting to continue in situations in which the change in the relationship of the hedging instrument and hedged item can be compensated for by adjusting the hedge ratio

– Ineffectiveness is recognized in P&LIneffectiveness is recognized in P&L

■ Risk management strategy vs. risk management objective

■ Rebalancing hedging relationships can be complex

■ Hedge documentation including expected sources of ineffectiveness is updated upon rebalancing


24

■ Voluntary discontinuation prohibited



26

Rebalancing and discontinuation of hedge accounting (continued)

Risk management objectiveDiscontinue

hedge

Nog j

still the same?hedge

accounting

Yes

Have the hedging instrument/hedged item

amounts actuallyused changed?

Rebalance

No

Yes

Outcome must not be

inconsistent with the purpose of


25

Continue hedge accounting

hedge accounting



27

Accounting for time value of purchased options – Option intrinsic value as hedging instrument

Fair value hedges and cash flow hedges

■ Change in fair value of the time value of a purchased option would be■ Change in fair value of the time value of a purchased option would be recognized in OCI to the extent that it relates to the hedged item

■ Reclassification to P&L depends on whether the hedged item is:

– Transaction-related: nature of hedged item is that of transaction costs

■ For example, hedged purchases and salesp , g p

– Time period-related: nature of hedged item is that of the cost for obtaining protection against a risk over a particular time period

■ For example, hedged inventory for six months

■ Applies to zero cost dollars


26

■ Less P&L volatility but more OCI volatility



28

Accounting for the forward element of a forward contract –Spot element as hedging instrument

Fair value hedges and cash flow hedges

■ Change in fair value of the forward element of a forward contract would■ Change in fair value of the forward element of a forward contract would be recognized in OCI to the extent that it relates to the hedged item

■ Less P&L volatility but more OCI volatility


27

■ Original forward element – amortized to P&L on a rational basis over the period to which the forward element relates



29

Effective date and transition

Effective date

■ Annual periods beginning on or after January 1 2015 – consistent with■ Annual periods beginning on or after January 1, 2015 – consistent with the Amendments to IFRS 9

■ Early adoption permitted if all existing IFRS 9 requirements simultaneously or previously adopted

Transition

G ll i■ Generally prospective

– Retrospective application:

■ Required for the time value of purchased options for all hedging relationships where an option’s intrinsic value was the hedging instrument under IAS 39


28

■ Permitted for hedging relationships where the spot element of a forward contract was the hedging instrument under IAS 39

– Election must be applied consistently



30


Overall, do you believe the SEC will decide in 2013 to incorporate IFRS in the financial reporting system for U.S. issuers?p g y

A. Yes

B. No


29



31

Comparison of IASB review draft and FASB ED

IASB Review Draft

■ Comprehensive change

FASB ED

■ Focuses on select key changes■ Comprehensive change

■ Non-derivative financial instruments eligible as hedging instrument in a hedge of FX risk under anyhedging model

■ Focuses on select key changes

■ Non-derivative financial instruments eligible as hedging instrument in a hedge of FX risk in a fair value hedge of a firm commitment or a net investment in a foreign operation

■ Non-derivative financial instruments measured at FV-NI eligible as hedging instrument

■ Hedging risk components of a non-financial item – Eligible if the i k i ifi ll id tifi bl d

■ Non-derivative financial instruments measured at FV-NI prohibited as hedging instrument

■ Hedging risk components of a non-financial item – Prohibited except for FX risk


30

risk is specifically identifiable and reliably measurable

except for FX risk

No substantive change from existing practice



32

Comparison of IASB review draft and FASB ED (continued)

IASB Review Draft

■ Revocable FVO for certain credit

FASB ED

■ No change in hedging credit risk or■ Revocable FVO for certain credit exposures managed for credit risk using credit derivatives

■ Hedging gross positions – no additional qualifying criteria

■ Hedging net positions, including

■ No change in hedging credit risk or the use of the general FVO

■ Hedging gross positions –similarity test

■ Hedging net positions,nil – eligible if criteria are met

■ Hedging aggregatedexposures – eligible

■ Hedging layer in a fair valuehedge – Eligible

including nil – prohibited

■ Hedging aggregatedexposures – Prohibited

■ Hedging a layer in a fair valuehedge – Prohibited


31

■ Effectiveness assessment – Hedge must pass a qualitative test; ongoing testing required

■ Effectiveness assessment – Hedge must be reasonably effective; ongoing testing only required under certain circumstancesNo substantive change from existing practice



33

Comparison of IASB review draft and FASB ED (continued)

IASB Review Draft

■ No assumption of

FASB ED

■ No assumption of■ No assumption ofperfective effectiveness

■ Cash flow hedge – retainsthe lower of test

■ Changes accounting for the time value of purchased option and

■ No assumption ofperfective effectiveness

■ Cash flow hedge – no lower of test

■ No change in the accounting for the time value of purchased options or

forward element of forward contracts

■ Rebalancing required in certain cases and allows hedgeaccounting to continue

■ Voluntary discontinuation prohibited

forward element of forward contracts

■ Rebalancing never required and would require hedgeaccounting to terminate

■ Voluntary discontinuation generally hibit d ( ff ti t i ti OK)


32

prohibited (effective termination OK)

No substantive change from existing practice



34

Questions and answers



35

Presenter’s contact details

Enrique TejerinaPhone: [email protected]

Mike GaisoPhone: 212-909-5397mgaiso@kpmg [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to


34

be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The information contained herein is of a general nature and is not intended to address the specific circumstances of any individual or entity.

KPMG and the KPMG logo are registered trademarks of KPMG International.

Date post:	14-Nov-2021
Category:	Documents
Upload:	others
View:	3 times
Download:	1 times

KPMG’sCFO KPMG s CFO Financial Forum and IFRS Institute ...

Documents