The current strict hedge accounting rules laid out in AASB 139 Financial Instruments: Recognition and Measurement are being replaced by much more practical ‘easier’ rules in the new standard AASB 9 Financial Instruments. These new rules will become mandatory for accounting periods starting on or after 1 January 2018 but Australian companies can early adopt these rules at any time between now and that date.
The new standard has simplified the hedge effectiveness testing criteria and has removed the 80-125% "highly effective" threshold and the mandatory requirement to perform forward and backward looking mathematical effectiveness tests. Under the new standard, for cash flow hedging of interest rate risk, if the item being hedged (hypothetical derivative) perfectly mirrors (i.e. the same quantity, timing and index) the hedging instrument (e.g. swap derivative) - then it may be sufficient to only carry out a forward looking qualitative test without the need to perform any further mathematical calculations at the start of the hedge relationship, thereby reducing the amount of mathematical calculations required to be performed to qualify for hedge accounting.
The rules in AASB 9 are far simpler and better reflect the economic practicalities of hedging and risk management. It is very likely the time for those entities that have steered clear of hedging because of AASB 139 to revisit the option. For those companies that have procedures in place to comply with AASB 139 rules, it may well be advantageous to move to the simplified rules early.
There is a window of opportunity to early adopt AASB 9 before 30 June 2015 to take advantage of the benefits of the less onerous hedge accounting requirements without also adopting the more complex new loan credit loss provisioning requirements. If you would like to find out more please contact firstname.lastname@example.org.
Judith was formerly a staff member at the International Accounting Standard Board and was part of the team that developed this new model and is ideally placed to assist with implementation of the new IFRS 9 standard including: - Providing accounting advice on the application of hedge accounting - Drafting hedge accounting documentation to comply with accounting standards - Drafting hedge accounting risk management policy to comply with the accounting standard - Assist with complying with the hedge effectiveness testing requirements.
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