The International Accounting Standards Board has proposed new standards that aim to simplify the accounting for hedging activities.

The exposure draft proposes requirements that would enable companies to reflect their risk management activities better in their financial statements, and, in turn, help investors to understand the effect of those activities on future cash flows.

The proposed model is principles-based, and would more closely align hedge accounting with the risk management activities undertaken by companies when hedging their financial and non-financial risk exposures.  The proposals also include enhanced presentation and new disclosure requirements.

“These proposals sweep away the existing rule-based, complex and inflexible hedge accounting requirements and replace them with a simple, principle-based approach,” said IASB Chairman Sir David Tweedie. “The result, if adopted, will be a much simpler model that better reflects risk management practices whilst providing more useful information to investors.”

The exposure draft builds on proposals contained in the IASB’s discussion paper, “Reducing Complexity when Reporting Financial Instruments,” published in March 2008. The exposure draft forms part of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and Measurement,” and when its proposals are confirmed they will be incorporated into IFRS 9, “Financial Instruments.” A summary of the proposals is available to download from the Snapshot library at http://www.ifrs.org/High+level+summaries/snapshot+library.htm.

The U.S. Financial Accounting Standards Board has published a draft Accounting Standards Update as part of its comprehensive project to revise accounting for financial instruments. The draft ASU proposed changes to classification and measurement, impairment accounting and hedging. It was focused solely on financial instruments, and proposed some limited changes to hedge accounting. The IASB’s project on hedge accounting is a comprehensive re-examination of hedge accounting, covering hedging of both financial and non-financial exposures. Hence, the hedging projects have a different scope.

The IASB exposure draft on hedge accounting is open for comment until March 9, 2011, and can be accessed via the “Comment on a proposal” section of www.ifrs.org.  During the consultation period, the IASB will undertake further outreach to seek views on the proposals. The IASB will redeliberate the proposals with a view to completing the new hedge accounting requirements in the first half of 2011. In addition to the general hedge accounting proposals in the exposure draft, the IASB is continuing to discuss portfolio macro hedge accounting.

For more information, visit the IFRS 9, “Financial Instruments,” section of the IASB Web site via http://go.ifrs.org/IFRS 9 Financial Instruments.

A webcast on the proposals will occur at 10:00 am ET on Monday, December 13. To register, please visit http://www.ifrs.org/News/Announcements+and+Speeches/hedge+accounting+webcast+Dec+2010.htm

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