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Comments from ACCA
January 2008

ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) proposing to make amendments to IAS39 Financial Instruments: Recognition and Measurement, which was considered by ACCA’s Financial Reporting Committee. I am writing to give you their views.

Overall comments

The proposed amendments aim to provide additional guidance on what IAS39 permits to be designated as a hedged item. They clarify the Board’s original intentions regarding what can be designated as a hedged item and when an entity may designate a portion of the cash flows of a financial instrument as a hedged item. In this respect we support the objectives of the ED.

We also note that the proposed amendments are rules based rather than principles based. As a general tenet we are in favour of principles based standard setting. However we believe that the nature of the clarifying guidance in the ED is inevitable given that qualification of hedge accounting is itself necessarily rules based, and therefore acknowledge the Board’s sentiments in this respects as laid out in the basis of conclusions.

ACCA responses to specific questions raised by IASB

Q1 The proposed amendments restrict the risks qualifying for designation as hedged risks to those identified in paragraph 80Y. Do you agree with the proposal to restrict the risks that qualify for designation as hedged risks? If not why not? Are there any other risks that should be included in the list and why?

We agree with the proposal to restrict the risks that qualify for designation as hedged items. We believe the list of qualifying risks is helpful in clarifying the requirements of IAS39, and is reasonably complete with regards identifying the more commonly hedged risks of financial items. One specific risk which the Board has excluded from the list in paragraph 80Y is that of equity price risk. We believe that it would be appropriate to include this in any amended standard.

Q2
(a) Do you agree with the proposal to specify when an entity can designate a portion of the cash flows of a financial instrument as a hedged item? (b) Are there any other situations in which an entity should be permitted to designate a portion of the cash flows of a financial instrument as a hedged item?

We agree that with the proposal in paragraph 80Z to specify when an entity can designate a portion of the cash flows of a financial instrument as a hedged item. We are not aware of any other situations in which an entity should be permitted to designate a portion of cash flows of a financial instrument as a hedged item.

Q3 The aim of the proposed amendments is to clarify the Board’s original intentions regarding what can be designated as a hedged item and in that way to prevent divergence in practice from arising. Would the proposed amendments result in a significant change to existing practice? Is so, what would those changes be?

In general we do not consider that the proposed amendments to what can be designated a hedge item will have significant change on existing practice.

We acknowledge that in respect of hedging one-sided risks with options (as discussed in BC14) the restriction of this approach may cause changes to existing practices. It is likely to lead to recognition or ineffectiveness or disqualification of certain options which entities may have entered into for hedging purposes. This will be particularly evident for those entities that inferred the time value of the option in the hedged item.

However, we do believe that the clarification relating to both what items can be designated as hedged items and the proposal to restrict an entity to designate as a hedged item a cash flow that does not exist in the instrument as a whole (paragraph AG99E), will prevent divergent practices.

Q4 The proposed changes would be required to be applied retrospectively. Is the requirement to apply the proposed changes retrospectively appropriate? If not, what do you propose and why?

Whilst we accept the conclusion as set out in BC15, in principle, the Board would need to consider whether many entities would have to apply hindsight on estimates made in previous financial statements. This would be contra to IFRS1 and we would not support this.

In addition, for those entities that previously deferred the time value of options as mentioned in our response to question 3, there would be no ability to re-designate (to intrinsic value only) given the fact that the appropriate documentation would not have been in place to support this designation. The Board may need to consider the transition requirements for such entities, in order to ensure comparability between entities who used alternative designations originally.

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