What are the main benefits?
OF IRFS 9 on hedge accounting
Everyone seems to agree on all benefits brought by IFRS 9 on hedge accounting. But what are the most important benefits?
1. Reduction of P&L volatility as with new provisions more hedges will qualify for hedge accounting and consequently reduce volatility (e.g. ability to hedge the component risk of a non-financial item, removal of [80-125] corridor for effectiveness, …)
2. More instruments available. The Time Value (TV) of options are not anymore required to be booked into P&L. Now TV will be considered as cost of hedging and be treated as a separate element of equity.
3. Possibility to revisit hedging strategies and to hedge more in terms of portfolio and to use cash-flow at risk to identify correlation between risks.
4. It reflects better and more accurately how an entity manages its risks and the extent to which hedging mitigates those risks. The new model provides a better link between an entity’s risk management strategy, the rationale for hedging and the impact of hedging on financial statements.
5. All-in it simplifies hedge accounting principles, corrects some of the IAS 39 errors and will be more principles-based.
At the end of the day, we can agree that IFRS 9 will offer a better alignment of hedge accounting and risk management strategies. However, although the principles in the new standard will provide welcome relief, the application guidance in some areas remains complex. Significant effort may be needed to analyze the requirements, consider alternatives and determine how best to apply them to an entity’s particular circumstances.
François Masquelier, Chairman of ATEL