Hedge Accounting under IFRS

Course Overview:

A major objective of the IAS 39 hedge accounting regime was to neutralise the perverse outcomes of applying the standard’s basic provisions to the most widely used, commercially sound hedging strategies.  But the experience of many practitioners is that IAS 39 hedge accounting has been at best only partially successful, and at worst has aggravated the problem.  There is evidence that some companies are so anxious not to have to report the arbitrary fluctuations in earnings caused by the application of IAS 39, that they have ‘let the accounting tail wag the business dog’, and refrained from engaging in commercially prudent hedging activities.

Current indications are that the hedge accounting provisions of the IAS 39 replacement standard, IFRS 9, will be both more principles-based and more pragmatic.  But the mandatory introduction of IFRS 9 may now be deferred to 2015, and the definitive hedge accounting provisions have yet to be published, so users will clearly have to live with the existing regime for some time yet.

This course has been designed with the interests of several constituencies in mind, including the preparers, risk managers and senior management of user entities, as well as external stakeholders such as analysts, investors, lenders and regulators.

The IFRS hedge accounting regime is both principles-based and particularly ‘rich’ in specific rules – and in exceptions to them.  The first objective of this course is to give participants a clear road-map through the maze of provisions.  Secondary objectives are (a) to give preparers and their managers a more informed basis for their hedge-accounting decisions, with a clear view of the costs and benefits of all the alternatives, and (b) to enable analysts to evaluate the underlying quality of earnings behind the ‘noise’ of the IAS 39 numbers.

The course makes extensive use of real-life comparative case studies and of fully worked examples.

Course Content:

Hedge accounting: rationale and rules

• Objective of hedge accounting: to eliminate accounting distortions
• Aligning hedge accounting with general risk management strategy
• Hedging instruments and hedged items: eligibility criteria
• Designing a hedge so as to minimise ineffectiveness
• Documentation requirements
• Selecting the best technique for testing hedge effectiveness

Accounting for fair value hedges

• Typical scenarios for fair value hedge accounting
• Detailed accounting rules for fair value hedge accounting
• Typical problems: (a) portfolio hedging and (b) hedging of non-financial items
• Representative selection of worked examples, with alternatives
• Case studies: interest rate and foreign currency exposure hedging of assets and liabilities

Accounting for cash flow hedges

• Typical scenarios for cash flow hedge accounting
• Detailed accounting rules for cash flow hedge accounting
• Typical problems: (a) ‘highly probable forecast transactions’, (b) the temptation to under-hedge, and (c) how to recycle hedging gains and losses through the income statement
• Representative selection of worked examples, with alternatives
• Case studies: fixed rate debt issuance, aircraft manufacturer sales receivables, airline fuel hedging

Other issues

• Accounting for net investment in a foreign operation
  • Managing a fluctuating and uncertain exposure
  • Countering the bias towards under-hedging
• Update on latest IFRS 9 developments

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at post@redcliffetraining.co.uk.